Federal Deposit Insurance Corporation
From Wikipedia, the free encyclopedia
The (FDIC) is a United States government corporation created by the Glass-Steagall Act of 1933. The vast number of bank failures in the Great Depression spurred the United States Congress into creating an institution which would guarantee banks, inspired by the Commonwealth of Massachusetts and its Deposit Insurance Fund (DIF). The FDIC provides deposit insurance which currently guarantees checking and savings deposits in member banks up to $100,000 per depositor.
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[edit] History
[edit] Inception
During the Great Depression, Republican Senator Arthur Vandenberg and Democratic Representative Henry Steagall wanted 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 the depositors received about 85% of their money. It is an urban legend that millions of people lost their money in banks; rather, but most were forced to withdraw their deposits anyway so they could pay their bills. The total of all deposits in all 9,106 banks that suspended 1929-33 was $6.886 billion; losses to depositers were $1.336 billion or 19%. [1]
In May, the U.S. House Banking and Currency Committee reported a bill to insure deposits 100 percent to $10,000, 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 Cummings 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, which 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 went bankrupt and was merged into the FDIC, which now has responsibility for insuring both commercial banks and thrifts. (Credit unions are insured by the National Credit Union Administration.) The primary legislative response to the crisis were the Financial Institutions Reform, Recovery and Enforcement Act of 1989 and Federal Deposit Insurance Corporation Improvement Act of 1991.
The cost to taxpayers of resolving the crisis has been estimated at $150 billion.
[edit] FDIC funds
There are two separate FDIC funds; one is the Bank Insurance Fund (BIF), and the other is 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". However, the government was not responsive; the Deposit Insurance Funds Act of 1996 made a provision for merging the two funds, but this was not enacted.[4]
[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 the following types of accounts:
- Checking accounts, Negotiable Order of Withdrawal, also called NOW accounts (checking accounts that earn interest), and money market deposit accounts, also called MMDAs (savings accounts that allow a limited number of checks to be written each month.)
- Savings accounts that you can add to or withdraw from at any time.
- "Money market" accounts, essentially high-interest savings accounts (the name is similar to "money market funds" which are not insured).
- Certificates of deposit (CDs), which generally require you to keep funds in the account for a set period.
Each type of account is separately insured. One person could keep $100,000 in accounts at two separate banks and be insured for a total of $200,000. Different types of accounts are also separately insured. The Federal Deposit Insurance Reform Act raised the amount of insurance for retirement accounts to $250,000
[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.
- 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.
- Errors made in your accounts. 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] Notes and references
- ^ Historical Statistics series X741-755
- ^ Stuart L. Weiss; The President's Man: Leo Crowley and Franklin Roosevelt in Peace and War;; Southern Illinois University Press, 1996.
- ^ Sicilia, David B. & Cruikshank, Jeffrey L. (2000). The Greenspan Effect, pp. 96–97. New York: McGraw-Hill. ISBN 0-07-134919-7.
- ^ Sicilia & Cruikshank, pp. 97–98.
