The gist: If your bank fails, will you lose the money you deposited? The answer is no because the FDIC will step in and make sure you can get your money back.
The banking system will not work unless people (AKA “depositors”) have confidence that they won’t lose their money. This is why we have the FDIC. If your bank declares bankruptcy or is suddenly unable to meet their financial obligations, the FDIC will provide the cash necessary for customers to withdraw their money up to a $250,000 limit.
This insurance applies to a variety of account types including checking and savings accounts, IRAs, certificates of deposit (CDs), money market accounts, employee benefit plans, and revocable and irrevocable trust accounts.
What is the FDIC?
The FDIC is an independent agency created by Congress in 1933 in response to the Great Depression. Officials wanted a way to prevent, or limit, the risk of a “run-on-the-bank.” This is a scenario in which all of the customers at a bank withdraw all of their cash at once which leaves some people short of their total account balance.
If an FDIC-insured bank fails, the FDIC steps in to protect the insured deposits and ensure a smooth transition for the bank's customers. This protection helps maintain trust in the banking system and encourages consumers to deposit their money in banks, knowing their funds are safe up to the insured limit.
This deposit insurance is automatic as long as you’re using a bank that is a member firm. There is no need to enroll or apply for coverage. It begins the moment you open an account and start making deposits.
How do I know if my accounts are FDIC insured?
FDIC coverage is automatic whenever you open an account at an FDIC-insured bank or financial institution. To be certain that your deposits are insured, make sure you are opening accounts and putting funds into deposits at a covered bank. You can find out more information about which banks are covered by the FDIC on the FDIC official website. Most banks that are FDIC insured will also make this information very clear on their websites.
How does the FDIC work?
The FDIC states that their core goal is to “maintain stability and public confidence in the nation's financial system.”
To do so, the FDIC:
- Insures deposits
- Supervises financial institutions for safety and consumer protection
- Manages receiverships
- Ensures that makes large and complex financial institutions are resolvable
What does all of this mean? It means that if your bank falls, the FDIC is there to catch them.
Most banks in the United States are required to become members of the FDIC. In order to become a member, banks must meet specific criteria and follow certain regulations to maintain their insured status.
Essentially, the FDIC has four major focuses:
1. Collect insurance premiums from member banks:
FDIC-insured banks pay insurance premiums into the Deposit Insurance Fund (DIF), which the FDIC manages. The premiums are calculated based on several metrics including the bank's size, risk level, and the total amount of insured deposits. This fund is the source of money used to repay customers if their bank fails.
2. Monitor and regulate member banks:
The FDIC regularly examines and supervises its member banks to ensure they are operating safely. To do so, the FDIC assesses their financial health, risk management practices, compliance with banking laws and regulations.
3. Provide payouts to depositors:
In the event of a bank failure, the FDIC guarantees that insured depositors receive their funds up to the coverage limit, which is currently $250,000 per depositor per insured bank. Federal law states that this process must happen “as soon as possible.” In most cases the FDIC makes payments within days of a bank's closure.
4. Manage bank failures and resolutions:
If an FDIC-insured bank fails, the FDIC steps in to manage the resolution process. This means that the FDIC becomes the receiver of the failed bank and then sells the assets and begins the process of settling its debts which includes claims for deposits in excess of the insured limit. This process can also include finding a healthy bank to acquire the failing bank's assets and liabilities.
What is FDIC insurance?
FDIC is how the US government gives consumers absolute confidence that the money they deposit in a bank is safe up to $250,000.
No US account holder should bank with an institution that is not an FDIC member. Though bank failures are not common, they do happen. Consider that 563 banks failed between 2001 through 2023 according to data from the FDIC.
FDIC insurance is how you, as a bank account holder, know that:
- You money, up to $250,000, is fully insured
- The payout from the FDIC will be made in a matter of days
What does the FDIC cover?
The deposit products insured by the FDIC include:
- Checking accounts
- Savings accounts
- Money market deposit accounts
- Certificates of deposit (CD)
- Prepaid cards (assuming certain FDIC requirements are met)
It is also important to know what assets the FDIC doesn’t ensure. These include:
- Stock investments
- Bond investments
- Mutual funds
- Crypto Assets
- Life insurance policies
- Municipal securities
- Safe deposit boxes or their contents
- U.S. Treasury bills, bonds or notes
Why is the FDIC important to me?
You should pay attention to what the FDIC does in two situations:
- When a bank fails
Even if the failed bank is not yours, you should watch how the FDIC responds and how fast they do so. This gives you a clear sense of what would happen to you if your FDIC member bank failed. You’ll see how long it takes account holders to get their money back and how the process works. You’ll also see how effective the FDIC is at liquidating assets or finding a healthy bank to acquire the failed bank’s assets. You’ll also see if the resolution process allows customers with more than $250,000 to recover the portion of their money that isn’t covered.
- If your bank fails
You’ll need to follow instructions provided by the FDIC to recover your money. This process usually happens in one of two ways:
- You’re provided with a new account at another insured bank in an amount equal to the insured balance of your account at the failed bank
- You’re issued a check for the insured balance of your account at the failed bank
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Disclaimer: Super created this blog for general informational purposes only. The contents of this blog do not constitute professional financial advice. We strive to keep this information accurate and up to date to the best of our knowledge; however, we cannot guarantee continuous accuracy. Contents of the blog are subject to change without notice.