Orlando Harmon
Banks and insurance companies are both financial institutions, but they have different business models and face different risks. Banks are subject to federal and state oversight and have access to a centralized payment and clearing organization, while insurance companies are subject only to state-level regulation and are not part of a centralized clearing and payment system. Banks accept deposits and make loans, while insurance companies ensure their customers against certain risks, such as accidents or property damage, in exchange for regular insurance premiums. Banks can offer insurance products to their customers, but they also need insurance themselves. In the US, most bank accounts are insured by the Federal Deposit Insurance Corporation (FDIC), which guarantees deposits up to $250,000 per account. The FDIC manages the Bank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF), insuring deposits in commercial banks and savings banks. When a bank fails, the FDIC steps in to protect insured depositors and can negotiate purchase and assumption transactions with other institutions.
| Characteristics | Values |
|---|---|
| Type of Insurance | Federal Deposit Insurance (FDIC) |
| Who is it for? | Banks and diversified financial institutions |
| Who provides it? | Federal Deposit Insurance Corporation (FDIC), an independent agency of the US government |
| What does it protect against? | Loss of deposit if the bank fails |
| What is the protection limit? | Up to $250,000 for principal and interest per account |
| What types of accounts does it cover? | Checking, savings, negotiable orders of withdrawal (NOW), money market deposit accounts (MMDA) |
| What types of accounts does it not cover? | Share accounts at credit unions, stocks, bonds, money market funds, cryptocurrency, US Treasury securities (T-bills), safe deposit boxes, annuities, insurance products |
| What is the process if an insured bank fails? | The FDIC may liquidate the institution, execute an insured deposit transfer, or negotiate a purchase and assumption (P&A) transaction with another institution |
| What additional coverage may be needed? | Management liability, property/casualty, cyber breach protection |
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What You'll Learn
Federal Deposit Insurance Corporation (FDIC)
The Federal Deposit Insurance Corporation (FDIC) is an independent agency created by Congress to maintain stability and public confidence in the nation's financial system. The FDIC was established under the Banking Act of 1933 in response to the numerous bank failures during the Great Depression. The FDIC began insuring banks on January 1, 1934, and has since increased its insurance limit several times, with the basic insurance coverage amount currently at $250,000 per ownership category. The FDIC manages two deposit insurance funds: the Bank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF). BIF insures deposits in commercial banks and savings banks up to a maximum of $100,000 per account, while SAIF covers deposits in savings associations.
The FDIC has several roles and responsibilities, including:
- Insuring deposits in member banks up to the specified limits. FDIC insurance is backed by the full faith and credit of the US government, ensuring that depositors receive their money even if the bank fails.
- Examining and supervising financial institutions for safety, soundness, and consumer protection. This includes providing guidance, information, and training programs to bankers.
- Making large and complex financial institutions resolvable.
- Managing the resolution of failed banks, such as through purchase and assumption (P&A) transactions, where a healthy institution acquires a failed bank's assets and deposits. The FDIC can also negotiate P&A transactions to protect both insured and uninsured depositors.
- Acting as a receiver for failed banks, protecting depositors, and maximising recoveries for creditors.
The FDIC is funded through insurance premiums on deposits held by insured banks and savings associations, as well as interest earned on these premiums. It does not operate on funds appropriated by Congress. The FDIC has a five-member board that includes the Chairman of the FDIC, the Comptroller of the Currency, and other key figures in the financial regulatory space.
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Bank Insurance Fund (BIF)
Banks are subject to federal and state oversight and have come under greater scrutiny since the 2007 financial crisis. They are also more susceptible to runs by depositors. In the United States, federal deposit insurance is mandatory for all federally-chartered banks and savings institutions.
The Bank Insurance Fund (BIF) was a unit of the Federal Deposit Insurance Corporation (FDIC) that provided insurance protection for banks that were not classified as savings and loan associations. The BIF was created in 1989 as a result of the savings and loan crisis that occurred in the late 1980s. The fund provided coverage for depository institutions that were not classified as savings and loan associations. The BIF was formed to keep the administration of bank and thrift insurance programs separate.
The FDIC manages two deposit insurance funds: the BIF and the Savings Association Insurance Fund (SAIF). The BIF insured deposits in commercial banks and savings banks up to a maximum of $100,000 per account. This was later raised to $250,000 per customer account. The BIF received no taxpayer money. Instead, insured banks paid for deposit insurance through premium assessments on their domestic deposits.
In 2005, the Federal Deposit Insurance Act abolished the BIF and the SAIF and created a single Deposit Insurance Fund (DIF). The DIF is funded mainly through quarterly assessments on insured banks, but it also receives interest income on its securities. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 revised the FDIC's fund management authority by setting requirements for the Designated Reserve Ratio (DRR) and redefining the assessment base, which is used to calculate banks' quarterly assessments.
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Savings Association Insurance Fund (SAIF)
Banks are subject to federal and state oversight and have come under greater scrutiny since the 2007 financial crisis. They are also susceptible to runs by depositors. In the United States, federal deposit insurance is mandatory for all federally chartered banks and savings institutions. All states also require federal deposit insurance for newly chartered banks that accept retail deposits. Banks also have access to a central bank system through the Federal Reserve and its facilities and support.
The Savings Association Insurance Fund (SAIF) was a government insurance fund for savings and loans and thrift institutions in the United States. It was created to protect depositors from losses due to institutional failure. SAIF was formed in the aftermath of the savings and loan crisis of the late 1980s, during which poor real estate investments led to the failure of over 1,000 of America's savings and loan institutions, costing taxpayers more than $160 billion. The fund replaced the Federal Savings and Loan Insurance Corporation (FSLIC), which had become insolvent during the 1980s savings and loan crisis.
The SAIF was administered as a standalone fund by the Federal Deposit Insurance Corporation (FDIC) until 2006 when it was combined with the FDIC's Bank Insurance Fund (BIF). Before the merger, SAIF had 1,430 members, approximately 16% of the FDIC's main bank fund members, and insured an estimated $709 billion in deposits. SAIF-member institutions are geographically concentrated, unlike BIF-member institutions.
The merger of the BIF and SAIF was authorised by the Federal Deposit Insurance Reform Act of 2005, which was passed in March 2006, and took effect on 31 March 2006. The merged entity became a single Deposit Insurance Fund (DIF). The idea of a merger had been under consideration for some time due to concerns about SAIF's vulnerability, partly due to its small size and geographic concentration.
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FDIC insurance limits
Federal deposit insurance is mandatory for all federally-chartered banks and savings institutions. The Federal Deposit Insurance Corporation (FDIC) manages two deposit insurance funds: the Bank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF). The BIF insures deposits in commercial and savings banks up to a maximum of $100,000 per account.
FDIC insurance covers depositor accounts at each insured bank, including principal and any accrued interest, up to the insurance limit. The standard maximum deposit insurance amount is $250,000 per depositor, per insured bank, for each account ownership category. This means that if a person has a certificate of deposit at Bank A and another at Bank B, each account would be insured separately up to $250,000.
FDIC insurance covers deposits in all types of accounts at FDIC-insured banks, but it does not cover non-deposit investment products, even those offered by FDIC-insured banks. For example, US Treasury Bills, Bonds, or Notes are not insured by the FDIC, although they are backed by the full faith and credit of the US government.
If a depositor has uninsured funds (i.e., funds above the insured limit), they may recover some portion of their uninsured funds from the proceeds of the sale of failed bank assets. This can take several years, and depositors usually receive periodic payments on a pro-rata basis.
FDIC deposit insurance protects your money in deposit accounts at FDIC-insured banks in the event of bank failure. Since the FDIC was founded in 1933, no depositor has lost any FDIC-insured funds.
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FDIC and systemic bank failure
Banks are subject to federal and state oversight and have been under greater scrutiny since the 2007 financial crisis. They are more susceptible to runs by depositors due to their systemic linkages. Banks operate as part of a wider banking system and have access to a centralized payment and clearing organization, which can spread contagion from one bank to another. In the US, banks also have access to a central bank system through the Federal Reserve.
Federal deposit insurance is mandatory for all federally-chartered banks and savings institutions. The Federal Deposit Insurance Corporation (FDIC) manages two deposit insurance funds: the Bank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF). The BIF insures deposits in commercial banks and savings banks up to a maximum of $100,000 per account. Insured banks pay for deposit insurance through premium assessments on their domestic deposits.
When an insured bank fails, the FDIC receives the institution from its charterer and ensures that insured depositors can access their accounts. The FDIC may liquidate the institution, issue checks for insured deposits, dissolve the bank, and sell off its assets. Alternatively, the FDIC can execute an insured deposit transfer, selling the failed bank's insured deposits to another institution for a fee. The FDIC can also negotiate a purchase and assumption transaction, where a healthy institution buys the failed bank's assets and deposits, with the FDIC restoring the failed institution's assets through cash payments or guarantees.
In March 2023, the federal government stabilized the banking sector following the failure of Silicon Valley Bank and Signature Bank. The Treasury Secretary invoked the systemic risk exception in the Federal Deposit Insurance Act, allowing the FDIC to protect all deposits, including uninsured deposits, at both failed banks. This decision was based on recommendations from the FDIC and the Federal Reserve, and in consultation with the President. The FDIC's actions likely helped prevent further financial instability.
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Frequently asked questions
FDIC stands for Federal Deposit Insurance Corporation, an independent U.S. government corporation that provides insurance for most bank accounts.
FDIC insurance covers the principal and interest of an account, not exceeding the $250,000 limit per banking category. FDIC insurance covers eligible bank accounts, including individual accounts, joint accounts, and certain types of retirement savings accounts.
FDIC insurance covers deposit products, such as checking and savings accounts. It does not cover all types of accounts, including financial instruments such as stocks, bonds, and cryptocurrency.
You can check if your bank is FDIC-insured by visiting the FDIC Bank Find Suite page. FDIC insurance coverage is automatic whenever a deposit account is opened at an FDIC-insured bank or financial institution.
