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How the Federal Deposit Insurance Corporation Works


What Is the FDIC?
The sorrowful faces of the life-size statues are a powerful expression of the times, showing the inactivity and troubles of everyday citizens during the Great Depression.
The sorrowful faces of the life-size statues are a powerful expression of the times, showing the inactivity and troubles of everyday citizens during the Great Depression.
AFP/Paul J. Richards

When the Great Depression hit the United States in the late 1920s, banks collapsed like houses of cards. Between 1930 and 1933, some 9,000 U.S. banks failed and took $6.8 billion worth of consumer deposits with them [source: Wheelock]. Some of the banks eventually reopened and recovered their customers' deposits, but the public as a whole had lost faith in the banking system.

To shore up confidence in the banks, President Franklin D. Roosevelt signed the Banking Act of 1933, which, among other things, created the Federal Deposit Insurance Corporation. The primary purpose of the FDIC was to ensure that consumers who banked with an insured bank didn't lose their money if the bank curled up and died. The original coverage limit for each depositor was $2,500, which increased to $5,000 in 1934 [source: FDIC].

Other major events in the FDIC's history include:

  • The Federal Deposit Insurance Act of 1950 boosted insurance coverage to $10,000 per depositor. This law also authorized the FDIC to invest money in (or "bail out") a failing U.S. bank, if the bank's failure would cause serious economic turmoil in the community it served. The FDIC usually uses the term "too big to fail" to describe such financial institutions [source: FDIC].
  • The Depository Institutions Deregulation and Monetary Control Act of 1980 increased the FDIC's insurance coverage to $100,000 per depositor [source: FDIC].
  • The Federal Deposit Insurance Corporation Improvement Act of 1991 changed the flat-rate premium paid by insured banks to a risk-based premium, as with health insurance and auto policies. In the 1980s, years of recession saw massive bank failures in the U.S., especially among savings and loan institutions. The FDIC spent billions of dollars to bail out banks it deemed "too big to fail," but some of these banks ended up failing anyway. To prevent the FDIC from wasting money on unwise bailouts, this Act requires presidential approval of any bailout [source: FDIC].
  • The Emergency Economic Stabilization Act of 2008 was signed by President George W. Bush during the Great Recession to temporarily raise FDIC insurance coverage from $100,000 to $250,000 per depositor. The increase was supposed to last only through 2009, but was extended several times before President Barack Obama made the coverage hike permanent in 2010 when he signed the Dodd-Frank Wall Street Reform and Consumer Protection Act [source: FDIC].