The Federal Deposit Insurance Corporation (FDIC) is a United States government corporation providing deposit insurance to depositors in US banks. The FDIC was created by the 1933 Banking Act during the Great Depression (June 16, 1933) to restore trust in the American banking system; more than one-third of banks failed in the years before the FDIC's creation, and bank runs were common. The insurance limit was initially US $2,500 per ownership category. Since the passage of the Doddâ€"Frank Wall Street Reform and Consumer Protection Act in 2011, the FDIC insures deposits in member banks up to US $250,000 per ownership category.
The FDIC and its reserves are not funded by public funds; member banks' insurance dues are the FDIC's primary source of funding. The FDIC also has a US$100 billion line of credit with the United States Department of the Treasury. Only banks are insured by the FDIC; credit unions are insured up to the same insurance limit by the National Credit Union Administration, which is also a government agency.
As of May 1, 2017, the FDIC provided deposit insurance at 5,844 institutions. The FDIC also examines and supervises certain financial institutions for safety and soundness, performs certain consumer-protection functions, and manages receiverships of failed banks.
Ownership categories
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Each ownership category of a depositor's money is insured separately up to the insurance limit, and separately at each bank. Thus a depositor with $250,000 in each of three ownership categories at each of two banks would have six different insurance limits of $250,000, for total insurance coverage of 6 × $250,000 = $1,500,000. The distinct ownership categories are
- Single accounts (accounts not falling into any other category)
- Certain retirement accounts (including Individual Retirement Accounts (IRAs))
- Joint accounts (accounts with more than one owner with equal rights to withdraw)
- Revocable trust accounts (containing the words "Payable on death", "In trust for", etc.)
- Irrevocable trust accounts
- Employee Benefit Plan accounts (deposits of a pension plan)
- Corporation/Partnership/Unincorporated Association accounts
- Government accounts
All amounts that a particular depositor has in accounts in any particular ownership category at a particular bank are added together and are insured up to $250,000.
For joint accounts, each co-owner is assumed (unless the account specifically states otherwise) to own the same fraction of the account as does each other co-owner (even though each co-owner may be eligible to withdraw all funds from the account). Thus if three people jointly own a $750,000 account, the entire account balance is insured because each depositor's $250,000 share of the account is insured.
The owner of a revocable trust account is generally insured up to $250,000 for each unique beneficiary (subject to special rules if there are more than five of them). Thus if there is a single owner of an account that is specified as in trust for (payable on death to, etc.) three different beneficiaries, the funds in the account are insured up to $750,000.
Board of directors
The Board of Directors of the FDIC is the governing body of the FDIC. The board is composed of five members, three appointed by the president of the United States with the consent of the United States Senate and two ex officio members. The three appointed members each serve six-year terms. No more than three members of the board may be of the same political affiliation. The president, with the consent of the Senate, also designates one of the appointed members as chairman of the board, to serve a five-year term, and one of the appointed members as vice chairman of the board, to also serve a five-year term. The two ex officio members are the Comptroller of the Currency and the director of the Consumer Financial Protection Bureau (CFPB).
As of January 1, 2016, the members of the Board of Directors of the Federal Deposit Insurance Corporation were:
- Martin J. Gruenberg â€" Chairman of the Board
- Thomas M. Hoenig â€" Vice Chairman
- Joseph Otting â€" Comptroller of the Currency
- Richard Cordray â€" Director, Consumer Financial Protection Bureau
History
Panics of 1893 and 1907 and the Great Depression: 1893-1933
During the Panics of 1893 and 1907, many banks filed bankruptcy due to bank runs caused by contagion. Both of the panics renewed discussion on deposit insurance. In 1893, William Jennings Bryan presented a bill to Congress proposing a national deposit insurance fund. No action was taken, as the legislature paid more attention to the agricultural depression at the time.
After 1907, eight states established deposit insurance funds. Due to the lax regulation of banks and the widespread inability of banks to branch; small, local unit banksâ€"often with poor financial healthâ€"grew in numbers, especially in the western and southern states. In 1921, there were about 31,000 banks in the US. The Federal Reserve Act initially included a provision for nationwide deposit insurance, but it was removed from the bill by the House of Representatives. From 1893 to the FDIC's creation in 1933, 150 bills were submitted in Congress proposing deposit insurance.
There was widespread panic again over the American banking system due to fears over the strength of many banks in The Great Depression; more than one-third of all U.S. banks were closed by bank runs. Bank runs, sudden demands by large numbers of customers to withdraw all their funds at almost the same time, brought down many bank companies as depositors attempted to withdraw more money than the bank had available as cash. Small banks in rural areas were especially affected. Written and publicly announced reassurances and tightened regulations by the government failed to assuage depositors' fears.
Establishment of the FDIC: 1933
President Franklin D. Roosevelt himself was dubious about insuring bank deposits, saying, "We do not wish to make the United States Government liable for the mistakes and errors of individual banks, and put a premium on unsound banking in the future." But public support was overwhelmingly in favor, and the number of bank failures dropped to near zero. On 16 June 1933, Roosevelt signed the 1933 Banking Act into law, creating the FDIC. The initial plan set by Congress in 1934 was to insure deposits up to $2,500 ($45,734 today) adopting of a more generous, long-term plan after six months. However, the latter plan was abandoned for an increase of the insurance limit to $5,000 ($91,468 today).
The 1933 Banking Act:
- Established the FDIC as a temporary government corporation. The Banking Act of 1935 made the FDIC a permanent agency of the government and provided permanent deposit insurance maintained at the $5,000 level.
- Gave the FDIC authority to provide deposit insurance to banks
- Gave the FDIC the authority to regulate and supervise state non-member banks
- Funded the FDIC with initial loans of $289 million through the U.S. Treasury and the Federal Reserve, which were later paid back with interest
- Extended federal oversight to all commercial banks for the first time
- Separated commercial and investment banking (Glassâ€"Steagall Act)
- Prohibited banks from paying interest on checking accounts
- Allowed national banks to branch statewide, if allowed by state law.
Historical insurance limits
- 1934 â€" $2,500
- 1935 â€" $5,000
- 1950 â€" $10,000
- 1966 â€" $15,000
- 1969 â€" $20,000
- 1974 â€" $40,000
- 1980 â€" $100,000
- 2008 â€" $250,000
Congress approved a temporary increase in the deposit insurance limit from $100,000 to $250,000, which was effective from October 3, 2008, through December 31, 2010. On May 20, 2009, the temporary increase was extended through December 31, 2013. However, the Doddâ€"Frank Wall Street Reform and Consumer Protection Act (P.L.111-203), which was signed into law on July 21, 2010, made the $250,000 insurance limit permanent. In addition, the Federal Deposit Insurance Reform Act of 2005 (P.L.109-171) allows for the boards of the FDIC and the National Credit Union Administration (NCUA) to consider inflation and other factors every five years beginning in 2010 and, if warranted, to adjust the amounts under a specified formula.
S&L and bank crisis of the 1980s
Federal deposit insurance received its first large-scale test since the Great Depression in the late 1980s and early 1990s during the savings and loan crisis (which also affected commercial banks and savings banks).
The Federal Savings and Loan Insurance Corporation (FSLIC) had been created to insure deposits held by savings and loan institutions ("S&Ls", or "thrifts"). Because of a confluence of events, much of the S&L industry was insolvent, and many large banks were in trouble as well. FSLIC's reserves were insufficient to pay off the depositors of all of the failing thrifts, and fell into insolvency. FSLIC was abolished in August 1989 and replaced by the Resolution Trust Corporation (RTC). On December 31, 1995, the RTC was merged into the FDIC, and the FDIC became responsible for resolving failed thrifts. Supervision of thrifts became the responsibility of a new agency, the Office of Thrift Supervision (credit unions remained insured by the National Credit Union Administration). The primary legislative responses to the crisis were the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), and the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA). Federally chartered thrifts are now regulated by the Office of the Comptroller of the Currency (OCC), and state-chartered thrifts by the FDIC.
Final combined total for all direct and indirect losses of FSLIC and RTC resolutions was an estimated $152.9 billion. Of this total amount, U.S. taxpayer losses amounted to approximately $123.8 billion (81% of the total costs.)
No taxpayer money was used to resolve FDIC-insured institutions.
2008â€"2010 Financial crisis
2008
In 2008, twenty-five U.S. banks became insolvent and were closed by their respective chartering authority. However, during that year, the largest bank failure in terms of dollar value occurred on September 26, 2008, when Washington Mutual, with $307 billion in assets, experienced a 10-day bank run on its deposits.
The FDIC created the Temporary Liquidity Guarantee Program (TLGP) to strengthen confidence and encourage liquidity in the banking system by guaranteeing newly issued senior unsecured debt of banks, thrifts, and certain holding companies, and by providing full coverage of non-interest bearing deposit transaction accounts, regardless of dollar amount.
The deposit insurance limit was temporarily raised from $100,000 to $250,000.
2009
On August 14, 2009, Bloomberg reported that more than 150 publicly traded U.S. lenders had nonperforming loans above 5% of their total holdings. This is important because former regulators say that this is the level that can wipe out a bank's equity and threaten its survival. While this ratio does not always lead to bank failures if the banks in question have raised additional capital and have properly established reserves for the bad debt, it is an important indicator for future FDIC activity.
On August 21, 2009, Guaranty Bank, in Texas, became insolvent and was taken over by BBVA Compass, the U.S. division of Banco Bilbao Vizcaya Argentaria, the second-largest bank in Spain. This was the first foreign company to buy a failed bank during the credit crisis of 2008 and 2009. In addition, the FDIC agreed to share losses with BBVA on about $11 billion of Guaranty Bank's loans and other assets. This transaction alone cost the FDIC Deposit Insurance Fund $3 billion.
On August 27, 2009, the FDIC increased the number of troubled banks to 416 in the second quarter. That number compares to 305 just three months earlier. At the end of the third quarter, that number jumped to 552.
At the close of 2009, a total of 140 banks had become insolvent. This is the largest number of bank failures in a year since 1992, when 179 institutions failed.
2010
On February 23, 2010, FDIC Chairman Sheila Bair warned that the number of failures in 2010 could surpass the 140 banks that were seized in 2009. Commercial real estate overexposure was deemed the most serious threat to banks in 2010.
On April 30, 2010, the FDIC was appointed as receiver for three banks in Puerto Rico at a cost of $5.3 billion.
In 2010, 157 banks with approximately $92 billion in total assets failed.
In 2010, a new division within the FDIC, the Office of Complex Financial Institutions, was created to focus on the expanded responsibilities of the FDIC by the Dodd-Frank Act for the assessment of risk in the largest, systemically important financial institutions, or SIFIs.
Funds
Former funds
Between 1989 and 2006, there were two separate FDIC funds â€" the Bank Insurance Fund (BIF), and the Savings Association Insurance Fund (SAIF). The latter was established after the savings and loans crisis of the 1980s. The existence of two separate funds for the same purpose led to banks' attempting to shift from one fund to another, depending on the benefits each could provide. In the 1990s, SAIF premiums were, at one point, five times higher than BIF premiums; several banks attempted to qualify for the BIF, with some merging with institutions qualified for the BIF to avoid the higher premiums of the SAIF. This drove up the BIF premiums as well, resulting in a situation where both funds were charging higher premiums than necessary.
Then Chairman of the Federal Reserve Alan Greenspan was a critic of the system, saying, "We are, in effect, attempting to use government to enforce two different prices for the same item â€" namely, government-mandated deposit insurance. Such price differences only create efforts by market participants to arbitrage the difference." Greenspan proposed "to end this game and merge SAIF and BIF".
Deposit Insurance Fund
In February 2006, President George W. Bush signed into law the Federal Deposit Insurance Reform Act of 2005 (FDIRA) and a related conforming amendments act. The FDIRA contains technical and conforming changes to implement deposit insurance reform, as well as a number of study and survey requirements. Among the highlights of this law was merging the Bank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF) into a new fund, the Deposit Insurance Fund (DIF). This change was made effective March 31, 2006. The FDIC maintains the DIF by assessing depository institutions an insurance premium. The amount each institution is assessed is based both on the balance of insured deposits as well as on the degree of risk the institution poses to the insurance fund.
When a bank becomes insolvent, the FDIC is appointed receiver of the failed institution. As receiver, the FDIC takes title to the failed institution's assets and liquidates them; and as deposit insurer pays off the failed institution's deposit liabilities or pays another institution to assume them. Because the failed institution's assets are almost always always worth less than its deposit obligations, a bank failure results in a loss to the DIF.
Bond interest payments of the Financing Corporation, the funding vehicle for the "Resolution Fund" of the now defunct Federal Savings and Loan Insurance Corporation (FSLIC), are funded by DIF premiums.
A March 2008 memorandum to the FDIC board of directors shows a 2007 year-end Deposit Insurance Fund balance of about $52.4 billion, which represented a reserve ratio of 1.22% of its exposure to insured deposits, totaling about $4.29 trillion. The 2008 year-end insured deposits were projected to reach about $4.42 trillion with the reserve growing to $55.2 billion, a ratio of 1.25%. As of June 2008, the DIF had a balance of $45.2 billion. However, 9 months later, in March, 2009, the DIF fell to $13 billion. That was the lowest total since September, 1993 and represented a reserve ratio of 0.27% of its exposure to insured deposits totaling about $4.83 trillion. In the second quarter of 2009, the FDIC imposed an emergency fee aimed at raising $5.6 billion to replenish the DIF. However, Saxo Bank Research reported that, after Aug 7, further bank failures had reduced the DIF balance to $648.1 million.
The FDIC announced its intent, on September 29, 2009, to assess the banks, in advance, for three years' of premiums in an effort to avoid DIF insolvency. The FDIC revised its estimated costs of bank failures to about $100 billion over the next four years, an increase of $30 billion from the $70 billion estimate of earlier in 2009. The FDIC board voted to require insured banks to prepay $45 billion in premiums to replenish the fund. News media reported that the prepayment move would be inadequate to assure the financial stability of the FDIC insurance fund. The FDIC elected to request the prepayment so that the banks could recognize the expense over three years, instead of drawing down banks' statutory capital abruptly, at the time of the assessment. The fund is mandated by law to keep a balance equivalent to 1.15 percent of insured deposits. As of June 30, 2008, the insured banks held approximately $7,025 billion in total deposits, though not all of those are insured. As of September 30, 2012, total deposits at FDIC-insured institutions totaled roughly $10.54 trillion, although not all deposits are insured.
The DIF's reserves are not the only cash resources available to the FDIC. In addition to $67.3 billion of cash and U.S. Treasury securities held as of March 2016, the FDIC has the ability to borrow up to $100 billion from the Treasury. The FDIC can also demand special assessments from banks as it did in the second quarter of 2009.
"Full Faith and Credit"
In light of apparent systemic risks facing the banking system, the adequacy of FDIC's financial backing has come into question. According to the FDIC.gov website (as of March 2013), "FDIC deposit insurance is backed by the full faith and credit of the United States government. This means that the resources of the United States government stand behind FDIC-insured depositors." The statutory basis for this assertion is unclear, however. Congress, in 1987, passed a "Sense of Congress" to that effect, but such enactments do not carry the force of law.
Insurance requirements
To receive this benefit, member banks must follow certain liquidity and reserve requirements. Banks are classified in five groups according to their risk-based capital ratio:
- Well capitalized: 10% or higher
- Adequately capitalized: 8% or higher
- Undercapitalized: less than 8%
- Significantly undercapitalized: less than 6%
- Critically undercapitalized: less than 2%
When a bank becomes undercapitalized, the institution's primary regulator issues a warning to the bank. When the number drops below 6%, the primary regulator can change management and force the bank to take other corrective action. When the bank becomes critically undercapitalized the chartering authority closes the institution and appoints the FDIC as receiver of the bank.
At Q4 2010 884 banks had very low capital cushions against risk and were on the FDIC's "problem list".
Resolution of insolvent banks
A bank's chartering authorityâ€"either an individual state banking department or the U.S. Office of the Comptroller of the Currencyâ€"closes a bank and appoints the FDIC as receiver. In its role as a receiver the FDIC is tasked with protecting the depositors and maximizing the recoveries for the creditors of the failed institution. The FDIC does not close banks.
The FDIC as receiver is functionally and legally separate from the FDIC acting in its corporate role as deposit insurer, and the FDIC as receiver has separate rights, duties, and obligations from those of the FDIC as insurer. Courts have long recognized these dual and separate capacities.
In 1991, to comply with legislation, the FDIC amended its failure resolution procedures to decrease the costs to the deposit insurance funds. The procedures require the FDIC to choose the resolution alternative that is least costly to the deposit insurance fund of all possible methods for resolving the failed institution. Bids are submitted to the FDIC where they are reviewed and the least cost determination is made.
A receivership is designed to market the assets of a failed institution, liquidate them, and distribute the proceeds to the institution's creditors. The FDIC as receiver succeeds to the rights, powers, and privileges of the institution and its stockholders, officers, and directors. The FDIC may collect all obligations and money due to the institution, preserve or liquidate its assets and property, and perform any other function of the institution consistent with its appointment.
A receiver also has the power to merge a failed institution with another insured depository institution and to transfer its assets and liabilities without the consent or approval of any other agency, court, or party with contractual rights. Furthermore, a receiver may form a new institution, such as a bridge bank, to take over the assets and liabilities of the failed institution, or it may sell or pledge the assets of the failed institution to the FDIC in its corporate capacity.
The two most common ways for the FDIC to resolve a closed institution and fulfill its role as a receiver are:
- Purchase and Assumption Agreement (P&A), in which deposits (liabilities) are assumed by an open bank, which also purchases some or all of the failed bank's loans (assets). The bank's assets that convey to the FDIC as receiver are sold and auctioned through various methods, including online, and using contractors.
- Deposit Payoff, as soon as the appropriate chartering authority closes the bank or thrift, the FDIC is appointed receiver. The FDIC as insurer pays all of the failed institution's depositors with insured funds the full amount of their insured deposits. Depositors with uninsured funds and other general creditors (such as suppliers and service providers) of the failed institution do not receive either immediate or full reimbursement; instead, the FDIC as receiver issues them receivership certificates. A receivership certificate entitles its holder to a portion of the receiver's collections on the failed institution's assets.
Covered Insured Depository Institutions Resolution Plans
To assist the FDIC in resolving an insolvent bank, the FDIC requires plans including the required submission of a resolution plan by covered institutions requirement under the Dodd Frank Act. In addition to the Bank Holding Company ("BHC") resolution plans required under the Dodd Frank Act under Section 165(d), the FDIC requires a separate Covered Insured Depository Institution ("CIDI") resolution plan for US insured depositories with assets of $50 billion or more. Most of the largest, most complex BHCs are subject to both rules, requiring them to file a 165(d) resolution plan for the BHC that includes the BHC's core businesses and its most significant subsidiaries (i.e., "material entities"), as well as one or more CIDI plans depending on the number of US bank subsidiaries of the BHC that meet the $50 billion asset threshold.
On December 17, the FDIC issued guidance for the 2015 resolution plans of CIDIs of large bank holding companies (BHCs). The guidance provides clarity on the assumptions that are to be made in the CIDI resolution plans and what must be addressed and analyzed in the 2015 CIDI resolution plans including:
- The assumption that the CIDI must fail.
- The cause of CIDI failure must be a core business loss or impairment.
- At least one "multiple acquirer strategy" is required in the plan.
- A deep level of granularity is expected in the plan.
- Sales strategies must be feasible and supported by considerable acquirer detail.
- A detailed financial and liquidity analysis is needed.
- Key legal issues must be considered.
- Resolution obstacles must be addressed.
- The CIDI must be insolvent at the start of resolution.
Insured products
FDIC deposit insurance covers deposit accounts, which, by the FDIC definition, include:
- demand deposits (checking accounts of a type that formerly could not legally pay interest), and negotiable order of withdrawal accounts (NOW accounts, i.e., savings accounts that have check-writing privileges)
- savings accounts and money market deposit accounts (MMDAs, i.e., higher-interest savings accounts subject to check-writing restrictions)
- time deposits including certificates of deposit (CDs)
- outstanding cashier's checks, interest checks, and other negotiable instruments drawn on the accounts of the bank
- accounts denominated in foreign currencies
Accounts at different banks are insured separately. All branches of a bank are considered to form a single bank. Also, an Internet bank that is part of a brick and mortar bank is not considered to be a separate bank, even if the name differs. Non-US citizens are also covered by FDIC insurance as long as their deposits are in a domestic office of an FDIC-insured bank.
The FDIC publishes a guide entitled "Your Insured Deposits", which sets forth the general characteristics of FDIC deposit insurance, and addresses common questions asked by bank customers about deposit insurance.
Items not insured
Only the above types of accounts are insured. Some types of uninsured products, even if purchased through a covered financial institution, are:
- Stocks, bonds, and mutual funds including money funds
- The Securities Investor Protection Corporation, a separate institution chartered by Congress, provides protection against the loss of many types of such securities in the event of a brokerage failure, but not against losses on the investments.
- Further, as of September 19, 2008, the United States Treasury is offering an optional insurance program for money market funds, which guarantees the value of the assets.
- Exceptions have occurred, such as the FDIC bailout of bondholders of Continental Illinois.
- Investments backed by the U.S. government, such as Treasury securities
- The contents of safe deposit boxes.
- Even though the word deposit appears in the name, under federal law a safe deposit box is not a deposit account â€" it is merely a secured storage space rented by an institution to a customer.
- Losses due to theft or fraud at the institution.
- These situations are often covered by special insurance policies that banking institutions buy from private insurance companies.
- Accounting errors.
- In these situations, there may be remedies for consumers under state contract law, the Uniform Commercial Code, and some federal regulations, depending on the type of transaction.
- Insurance and annuity products, such as life, auto and homeowner's insurance.
See also
- Title 12 of the Code of Federal Regulations
- 2008â€"2010 bank failures in the United States
- Canada Deposit Insurance Corporation
- Financial crisis of 2007-2010
- List of acquired or bankrupt United States banks in the late 2000s financial crisis
- List of largest U.S. bank failures
- Too Big to Fail policy
Related agencies and programs
- CAMELS Rating System â€" used by the FDIC's Division of Risk Management Supervision (RMS) examiners to rate each bank and the FDIC problem bank list
- FDIC Enterprise Architecture Framework
- National Credit Union Administration
- Temporary Liquidity Guarantee Program
Notes
References
Bibliography
- Bovenzi, John (2015). Inside the FDIC: Thirty Years of Bank Failures, Bailouts, and Regulatory Battles. Manhattan: John Wiley & Sons. ISBNÂ 978-1-118-99408-5.Â
- Walter, John (2005). "Depression-Era Bank Failures: The Great Contagion or the Great Shakeout?". Economic Quarterly. 91 (1). Retrieved 4 December 2015.Â
- White, Eugene, N. (1981). "State-Sponsored Insurance of Bank Deposits in the United States, 1907-1929". The Journal of Economic History. 41 (3): 537â€"557. doi:10.1017/S0022050700044326.Â
- Golembe, Carter, H. (1960). "The Deposit Insurance Legislation of 1933: An Examination of Its Antecedents and its Purposes". Political Science Quarterly. 75 (2): 181â€"200. doi:10.2307/2146154.Â
Further reading
- 60 Minutes â€" Your Bank Has Failed: What Happens Next?
- Kaufman, George G. (2002). "Deposit Insurance". In David R. Henderson (ed.). Concise Encyclopedia of Economics (1st ed.). Library of Economics and Liberty. CS1 maint: Extra text: editors list (link) OCLC 317650570, 50016270, 163149563
- History including Boards of Directors
- Banking Act of 1935
- Banking Act of 1933
- Federal Deposit Insurance for Banks and Credit Unions Congressional Research Service
- Federal Deposit Insurance Reform Act
External links
- Federal Deposit Insurance Corporation (official website)
- Federal Deposit Insurance Corporation in the Federal Register
- FDIC Statistics at a Glance
- FDIC List of Failed Banks