Jane Dotson
Deposit insurance is a measure implemented by governments to protect bank customers in the event of a bank failure. It is designed to prevent bank runs, where depositors withdraw their money en masse due to a loss of confidence in the bank's solvency. The Federal Deposit Insurance Corporation (FDIC) in the United States, for example, insures deposits of up to $250,000 per depositor, per bank, per ownership category. This insurance is backed by the full faith and credit of the US government. Since its founding in 1933, no depositor has lost any FDIC-insured funds.
| Characteristics | Values |
|---|---|
| What is it? | A government guarantee that an account holder’s money at an insured bank is safe up to a certain amount. |
| Who provides it? | The Federal Deposit Insurance Corporation (FDIC), an independent agency of the United States government. |
| Who does it apply to? | Depositors at FDIC-insured banks. |
| How much is insured? | $250,000 per depositor, per FDIC-insured bank, per ownership category. |
| How is it funded? | Insurance premiums paid by banks and interest earned on the FDIC’s Deposit Insurance Fund, which is invested in US government obligations. |
| What happens when a bank fails? | The FDIC either sells the bank to a willing buyer or pays off the insured deposits and liquidates the failed bank’s assets. |
| What doesn't it cover? | Non-deposit investment products, even those offered by FDIC-insured banks, such as life insurance policies, municipal securities, and safe deposit boxes or their contents. |
| Where can I find out more? | The FDIC website provides detailed information about deposit insurance, including an Electronic Deposit Insurance Estimator (EDIE) tool to calculate your specific insurance coverage amount. |
| --- | --- |
| Note | This table provides a summary of key characteristics and values related to deposit insurance in the United States as of May 2024. For the most up-to-date information, please refer to the official FDIC website. |
What You'll Learn
The Federal Deposit Insurance Corporation (FDIC)
The FDIC insures deposits and examines and supervises financial institutions for safety, soundness, and consumer protection. It also makes large and complex financial institutions resolvable and manages receiverships. The FDIC is backed by the full faith and credit of the US government, and since its creation, no depositor has lost any FDIC-insured funds due to bank failure.
The FDIC provides deposit insurance to protect individuals' money in the event of a bank failure. Coverage is automatic and free for any deposit account opened at an FDIC-insured bank, and deposits are insured up to at least $250,000 per depositor, per FDIC-insured bank, and per ownership category. This includes various types of accounts, such as checking accounts, savings accounts, money market deposit accounts, and certificates of deposit, among others. However, it is important to note that the FDIC does not insure all financial products, and individuals should carefully review what is and isn't covered.
The FDIC is managed by a five-member Board of Directors, with each member appointed by the US President and confirmed by the Senate. The Board consists of a Chairman, Vice Chairman, Appointive Director, the Comptroller of the Currency, and the Director of the Bureau of Consumer Financial Protection.
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Deposit insurance coverage
The standard insurance amount is $250,000 per depositor, per insured bank, for each account ownership category. This means that if you have deposits in different account categories at the same FDIC-insured bank, your insurance coverage may be more than $250,000, if all requirements are met. If you have accounts at different FDIC-insured banks, the limit applies at each bank: $250,000 per depositor for each account ownership category.
The FDIC covers many common deposit accounts but doesn't insure investment accounts. Here are the types of covered accounts:
- Savings accounts (including high-yield savings accounts)
- Negotiable order of withdrawal (NOW) accounts
- Money market deposit accounts (MMDAs)
- Time deposits such as certificates of deposit (CDs)
- Cashier's checks, money orders and other official items issued by a bank
The following accounts are ineligible for FDIC coverage:
- Life insurance policies
- Municipal securities
- Safe deposit boxes or their contents
- U.S. Treasury bills, bonds or notes (although these are backed by the full faith and credit of the US government)
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Deposit insurance and financial stability
Deposit insurance is a measure implemented by governments to protect bank depositors from losses caused by a bank's inability to pay its debts. It is a component of a financial system safety net that promotes financial stability.
Deposit insurance is provided by the Federal Deposit Insurance Corporation (FDIC), a government agency that collects fees, or insurance premiums, from banks. The FDIC is overseen by a five-member board, with three members nominated by the President and confirmed by the Senate, as well as the Comptroller of the Currency and the director of the Consumer Financial Protection Bureau. The FDIC helps to maintain stability and public confidence in the financial system by insuring deposits of up to $250,000 per depositor, per ownership category, at each FDIC-insured bank.
The history of deposit insurance
Deposit insurance was created during the Great Depression in 1933, and has since sharply reduced the frequency of bank runs. The FDIC began operations in 1934, and since then, no depositor has lost their insured funds.
The FDIC is funded by insurance premiums paid by banks, as well as interest earned on the FDIC's Deposit Insurance Fund (DIF), which is invested in US government obligations. The DIF is backed by the full faith and credit of the US government. As of December 31, 2022, the DIF had $128.2 billion, about 1.27% of all insured deposits. The FDIC is working to increase this ratio to the statutory minimum of 1.35% by September 30, 2028, with a long-run target of 2% of insured deposits.
When a bank fails, the FDIC has two options. First, it can sell the bank to a willing buyer, which may take on some or all of the failed bank's assets and liabilities. Second, it can pay off the insured deposits and liquidate the failed bank's assets, with uninsured depositors recuperating money based on the value of the assets.
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Deposit insurance and bank runs
Deposit insurance is a policy that guarantees the safety of deposits in the event of bank failure. In the US, the Federal Deposit Insurance Corporation (FDIC) insures deposits in commercial banks and thrifts. This insurance is mandatory for all federally-chartered banks and savings institutions, as well as for newly-chartered banks that accept retail deposits in all states except Connecticut.
Deposit insurance provides several benefits to the economy. It assures small depositors that their deposits are safe and that they will have immediate access to their funds if their bank fails. It also maintains public confidence in the banking system, fostering economic stability. Without deposit insurance, banks would have to keep depositors' money on hand in cash at all times, as they would not be able to lend money. Deposit insurance also supports the banking structure, making it possible for the US to have a system of both large and small banks.
However, deposit insurance reduces "depositor discipline", which is the depositors' means of policing bank activity. This can increase the likelihood of bank runs, losses for small savers, and economic instability, particularly in credit markets.
A bank run occurs when a large number of depositors, fearing that their bank will be unable to repay their deposits in full and on time, simultaneously try to withdraw their funds immediately. This can cause problems because banks keep only a small fraction of deposits on hand in cash, lending out the majority of deposits to borrowers or investing them in other interest-bearing assets. When a run occurs, a bank must quickly increase its cash to meet depositors' demands, often by selling assets hastily and at a loss.
Deposit insurance can help address the mismatch between assets (loans) and liabilities (deposits), which is a liquidity issue. It makes depositors more patient and less prone to runs, as they know they will be able to withdraw their funds upon demand. However, it can also incentivize banks to take excessive risks, as they know that a risky investment won't spark a run.
While deposit insurance can help prevent bank runs, it is not sufficient on its own to ensure financial system stability. Adequate funding and strong bank supervision are also necessary.
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Deposit insurance and bank failures
Deposit insurance is a measure implemented by governments to protect bank customers in the event of a bank failure. It is designed to prevent bank runs, where depositors seek to withdraw their money en masse due to a loss of confidence in the bank. Since its introduction in 1933, deposit insurance has sharply reduced the frequency of bank runs in the US.
In the US, deposit insurance is provided by the Federal Deposit Insurance Corporation (FDIC), which insures deposits of up to $250,000 per depositor, per bank, per ownership category. Banks pay insurance premiums to the FDIC, which maintains a Deposit Insurance Fund (DIF) to cover deposits in the event of a bank failure. The FDIC also steps in to sell the failed bank's assets and recover depositors' money.
While deposit insurance helps maintain stability and public confidence in the financial system, it has also been criticised for encouraging risky behaviour by banks and depositors, also known as moral hazard. Without deposit insurance, depositors would be incentivised to choose banks prudently and monitor their risk management. However, with deposit insurance, depositors may not feel the need to do so, as their deposits are guaranteed by the government. This could lead to excessive risk-taking by banks, increasing the likelihood of bank failures.
To mitigate moral hazard, it is important to have a strong system of bank supervision in place, alongside deposit insurance. Prudential supervision involves onsite and offsite surveillance of banks to assess their financial health and identify risky activities. Additionally, charging risk-adjusted insurance premiums and keeping the size of deposits covered by insurance small can help to reduce moral hazard.
Overall, while deposit insurance is intended to protect depositors and promote financial stability, it is important to carefully balance it with measures to encourage prudent behaviour by banks and depositors.
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Frequently asked questions
Deposit insurance is the government's guarantee that an account holder's money at an insured bank is safe up to a certain amount. In the US, the Federal Deposit Insurance Corporation (FDIC) provides deposit insurance of up to $250,000 per account.
Deposit insurance is provided by the FDIC, a government agency that collects fees, or insurance premiums, from banks. The FDIC is overseen by a five-member board and is backed by the full faith and credit of the US government.
The FDIC is an independent agency of the United States government that protects bank depositors against the loss of their insured deposits in the event that an FDIC-insured bank or savings association fails.
The standard insurance amount is $250,000 per depositor, per FDIC-insured bank, for each account ownership category. This includes certain retirement accounts, joint accounts, trust accounts, and business accounts.
In the event of a bank failure, the FDIC responds in two ways. First, as the insurer of the bank's deposits, the FDIC pays insurance to depositors up to the insurance limit. Second, as the receiver of the failed bank, the FDIC assumes the task of selling/collecting the assets of the failed bank and settling its debts, including claims for deposits in excess of the insured limit.
