How the Federal Deposit Insurance Corporation Works

I­f you bank in the United States, you've probably seen the sticker posted on the door of your bank: FDIC. Maybe you've taken the time to expand the acronym: Federal Deposit Insurance Corporation. Maybe you've read the sticker's little assurance: "Each depositor insured to at least $100,000."

But what is the Federal Deposit Insurance Corporation? Where did it come from? How does it work? What does its insurance cover? To understand why the FDIC was created and how it works, it helps to understand the basic premises of insurance.

Insurance is like gambling. When you buy an insurance policy, whether it's auto, life or medical insurance, the insurance company assesses the risk of insuring you by asking questions like, what's the likelihood that a driver of a certain age and driving history is going to get into a fender bender? What's the likelihood that a woman of a certain age and medical history is going to accrue serious medical costs? What's the likelihood that employees working in a warehouse filled with dangerous machinery are going to get hurt?

If you're considered a low risk, the company will charge you a relatively low premium, a fee you pay for the insurance coverage. If you're considered a high risk, the company will charge you a high premium, or -- if you are a truly bad gamble -- choose not to cover you at all.

The premiums you pay go to the insurance company's insurance fund, which the company uses to pay an insured member when his car gets sideswiped or he hits his head on a forklift.

The FDIC's depositor insurance is, in principle, no different from any other insurance. Instead of insuring cars and workers, however, the FDIC insures people who hold deposit accounts with U.S. banking institutions.

For how long has the FDIC been around? How did it come to exist in the first place? Take a look at the next page.