Federal Deposit Insurance Corporation

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Federal Deposit Insurance Corporation
FDIC
Federal Deposit Insurance Corporation
Federal Deposit Insurance Corporation
Agency overview
Formed June 16, 1933
Jurisdiction Federal government of the United States
Headquarters Washington, D.C.
Employees 4,125 (2006)[1]
Agency Executives Sheila C. Bair, Chairman
 
Martin J. Gruenberg, Vice Chairman
Website
www.fdic.gov

The Federal Deposit Insurance Corporation (FDIC) is a United States government corporation created by the Glass-Steagall Act of 1933. It provides deposit insurance which currently guarantees checking and savings deposits in member banks up to $100,000 per depositor. The vast number of bank failures in the Great Depression spurred the United States Congress into creating an institution which would guarantee deposits held by commercial banks, inspired by the Commonwealth of Massachusetts and its Depositors Insurance Fund (DIF).

Accounts at different banks are insured separately. One person could keep $100,000 in accounts at two separate banks (which are not branches of the same bank) and be insured for a total of $200,000. Also, accounts in different ownerships (such as beneficial ownership, trusts, and joint accounts) can be considered separately for the $100,000 insurance limit. The Federal Deposit Insurance Reform Act of 2005 raised the amount of insurance for an Individual Retirement Account to $250,000.

The two most common methods employed by FDIC in cases of insolvency or illiquidity are the:

  • Payoff Method, in which insured deposits are paid by the FDIC, which attempts to recover its payments by liquidating the receivership estate of the failed bank.
  • Purchase and Assumption Method, in which all deposits (liabilities) are assumed by an open bank, which also purchases some or all of the failed bank's loans (assets).

Contents

[edit] History

[edit] Inception

As a result of the Great Depression, Republican Senator Arthur Vandenberg and Democratic Representative Henry Steagall strove to restore public confidence after a massive series of bank runs in early 1933 caused 4,004 banks to close, with an average of $900,000 in deposits. These banks were merged into stronger banks; many months later, depositors received compensation for roughly 85% of their former deposits.[citation needed] Although President Roosevelt did not like the idea of the FDIC, as a former banker himself, he agreed to the measure to stop the hemorrhaging of the banks' available cash and the American people's trust in the U.S. Banking System.

In May, the U.S. House Banking and Currency Committee submitted a bill that would insure deposits 100 percent to $10,000, and after that on a sliding scale; it would be financed by a small assessment on the banks. However the U.S. Senate Banking Committee reported a bill that excluded banks that were not members of the Federal Reserve System. Senator Vandenberg rejected both bills because neither contained a ceiling on the guarantees. He proposed an amendment covering all banks beginning using a temporary fund and a $2,500 ceiling. It was passed as the Glass-Steagall Deposit Insurance Act in June with Steagall's amendment that the program would be managed by the new Federal Deposit Insurance Corporation. Led by Chicago banker Walter J. Cummings, Jr. the FDIC soon included almost all the country's 19,000 banking offices. Insurance started January 1, 1934. President Franklin D. Roosevelt was personally opposed to insurance because it would protect irresponsible bankers, but yielded when he saw Congressional support was overwhelming. As the second head of FDIC in early 1934 he appointed Leo Crowley, a Wisconsin banker who, Roosevelt soon discovered, was using the FDIC to cover his own embezzlements. After some anguish, Roosevelt kept Crowley on and hushed up the episode. This early corruption was first revealed in 1996.[2]

[edit] S&L and bank crisis of the 1980s

Federal deposit insurance received its first large-scale test in the late 1980s and early 1990s during the savings and loan crisis (which also affected commercial banks).

The brunt of the crisis fell upon a parallel institution to the FDIC, the Federal Savings and Loan Insurance Corporation (FSLIC), created to insure savings and loan institutions (S&Ls, also called thrifts). Due to a confluence of events, much of the S&L industry was insolvent and many large banks were in trouble as well. The FSLIC became insolvent and, along with its insurance function, was merged into the FDIC. Thrifts are now overseen by the Office of Thrift Supervision, an agency that works closely with the FDIC and the Comptroller of the Currency. (Credit unions are 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 Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA).

This crisis cost taxpayers an estimated $150 billion to resolve.

[edit] FDIC funds

[edit] Former Funds

There were two separate FDIC funds; one was the Bank Insurance Fund (BIF), and the other was the Savings Association Insurance Fund (SAIF). The latter was established after the savings & 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 in order 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.[3]

Then Chairman of the Federal Reserve Alan Greenspan was a critic of the system, saying that "We are, in effect, attempting to use government to enforce two different prices for the same item — 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". [4]

[edit] Deposit Insurance Fund

In February, 2006, President George W. Bush signed The Federal Deposit Insurance Reform Act of 2005 (the Reform Act) into law. 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.

[edit] Insurance requirements

In order to receive this benefit member banks must follow certain liquidity and reserve requirements. Banks are classified in 5 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 FDIC issues a warning to the bank. When the number drops below 6% the FDIC can change management and force the bank to take other corrective action. When the bank becomes critically undercapitalized the FDIC declares the bank insolvent.

[edit] FDIC insured items

FDIC insurance covers "deposit accounts":

Accounts at different banks are insured separately. All branches of a bank are considered to comprise 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. FDIC publishes a guide entitled Your Insured Deposits setting forth the general contours of FDIC deposit insurance, and addressing common questions asked by bank customers about deposit insurance.

[edit] Non-FDIC insured items

Only the above types of accounts are insured. Some types of uninsured products, even if purchased through a covered financial institution, are:

  • Stocks, bonds, mutual funds, and money market 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.
  • Investments backed by the U.S. government, such as US 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 - it's a well-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.

[edit] See also

[edit] Notes and references

  1. ^ Best Places to Work in the Federal Government
  2. ^ Stuart L. Weiss; The President's Man: Leo Crowley and Franklin Roosevelt in Peace and War;; Southern Illinois University Press, 1996.
  3. ^ Sicilia, David B. & Cruikshank, Jeffrey L. (2000). The Greenspan Effect, pp. 96–97. New York: McGraw-Hill. ISBN 0-07-134919-7.
  4. ^ Sicilia & Cruikshank, pp. 97–98.

[edit] External links