What is the FDIC?

With the stream of bank failures more and more people are becoming concerned about the stability of their bank. Also, people are starting to rely upon the guarantees made by the FDIC to protect their money. But what exactly is the FDIC? And what does the FDIC protect anyone against?

The FDIC is the Federal Depositors Insurance Corporation. And that is exactly what it is, an insurance corporation. Contrary to popular belief, the FDIC is not a government institution. It is backed by the US Federal Government, but it is not an obligation of the government.

It is an insurance company that insurers deposits in a participating bank. In order to receive this insurance a depositor does not need to pay a premium, the bank pays that. The depositors only concern is to be sure that their financial institution is a member of the FDIC.

How does someone tell if their bank is a member of the FDIC?

Every bank insured by the FDIC must display a sign advertising FDIC coverage beside the teller window.

What institutions are covered by the FDIC?

Most banks are covered by the FDIC. This means that credit unions, insurance companies, investment firms, and some smaller banks are not covered.

The FDIC protects depositors against the loss of their money in the event of a bank failure. It does not insure against monetary loss at an institution, therefore it does not cover any variable investments.

The FDIC was created to reassure depositors and strengthen the banking system. It was not created to insure against a collapse of the banking system on a widespread scale. This is why there is concern every time a bank fails over how much it cost the FDIC. The FDIC does not have an unlimited amount of money to cover banks.

The FDIC only keeps a very small amount of money in reserves to back up all the deposits that it is insuring. If several large banks fail at once, causing a collapse of the banking system, the FDIC would not be able to cover all of its insured deposits.

Being backed by the Federal government means that the FDIC will likely eventually return all of that insured money to its depositors, but it could take quite some time.

In the final analysis, many people have been encouraged by the government to believe that the FDIC is a foolproof system to guarantee the banking system. Also, many people have come under the impression that the FDIC is government run, also incorrect.

The FDIC is not perfect, but it is a system that has worked in the past, has even worked recently to return money into the hands of depositors. It is very important that people understand how the system works and not put an unreasonable amount of faith in the system.