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Financial Fitness: What Does It Mean When Your Bank Is A Member Of The FDIC?

For most Americans who came of age after the Great Depression, hearing or seeing "Member FDIC” as part of your bank’s advertising or promotional materials, as well as a decal on the door or a plaque at the teller window is commonplace. Those subsequent generations did not experience the effects of losing their entire life savings, as depression-era depositors did when thousands of banks failed. There was no FDIC in 1929 and when a bank closed its doors, the money was gone and the depositors were out of luck. Still, most U.S. banking customers know that the FDIC is a federal agency that insures the money you deposit in your bank. But there are many questions surrounding the FDIC, what it does and does not insure, how much is ‘covered’ and how the insurance works when a bank fails.
In 1933, with the country still very much in the middle of the Great Depression, the FDIC was established. Many of the thousands of citizens who had lost money when their bank failed were skeptical (rightly so) of patronizing another bank that might also fail, taking their money away again. The government recognized the role of banks in the communities they served; to invest in the local businesses and community development. So to ease the fears of the public and to promote community growth, the FDIC came into being. Its charter was to guarantee that a depositor would not lose their money if their bank failed. 78 years later, no US depositor has lost a dime due to a bank failure after January 1, 1934; the FDIC has lived up to its charter. The FDIC is funded from premiums paid by its member banks; not from government funds.
Through the years the amount of funds covered by the FDIC has changed, gradually increasing from the starting limit of $2,500 per investor to its present limit of $250,000. But this amount can be deceiving, and is commonly misunderstood by depositors. The insurance limit does not represent the total deposits of an individual or family, but the total per depositor, per account type, within an individual bank. For example, if you are a single person with one checking account at your local bank, and the balance in that checking account is $500,000, then yes, you are over the covered limit and $250,000 is unprotected in case of bank failure. However, if you had both a checking account and an IRA account in that same bank and each contained $250,000, then the total $500,000 would be covered, as the 2 accounts are of different types, each covered independently. Similarly, a joint account owned by 2 depositors would be covered for up to $500,000 - $250,000 for each individual depositor. If you are unsure about whether your accounts would be completely covered by FDIC should your bank fail, the FDIC has a great on-line tool for calculating your exposure.
Deposit accounts such as checking, savings, money markets and CD’s are covered by the FDIC, as are revocable and irrevocable trust accounts and IRA’s. What are not covered are investment accounts such as mutual funds, stocks, bonds or annuities. As these investments by definition involve risk, they do not fall under FDIC protection. However, because investment products are often offered by local banks that are members of the FDIC, there is sometimes confusion on this point. If in doubt about your specific accounts, contact your banker or check the FDIC website for additional details.
In 1950, the Federal Deposit Insurance Act increased individual coverage to $10,000 and also authorized the FDIC to bail out failing banks under specific circumstances. The criterion needed to justify a bailout was if the bank was considered "too big to fail”. A bank was categorized as "too big to fail” if the FDIC determined that the community would suffer economically if the bank were to fail, leaving no entity to invest in the community and its business owners. During the 1980’s Savings & Loan crisis, the FSLIC (Federal Savings & Loan Insurance Corporation) - which served the same purpose as the FDIC to S&L’s - bailed out many S&L’s that went under despite the bailout. The FSLIC itself went bankrupt in the process and its function merged into the FDIC. In 1991, the Federal Deposit Insurance Act was amended because of the S&L crisis; the revised act specified that the President must approve all future bailouts. This has been the case during the current economic crisis, when many banks have been "bailed out” and many others have failed over the past few years.
Unlike the unfortunate victims of failed Depression-era banks, as long as we select an FDIC-insured bank for our deposit needs and are aware of the limits and specifics regarding FDIC coverage, our deposit accounts are safe. Even if a bank does fail, the FDIC steps in immediately on the behalf of all depositors. If a solvent bank is available to take on the deposits of the failed bank, they are transferred and the depositors are informed of the change. If no healthy bank is available to take over the accounts, the FDIC pays the depositors directly, by check, as soon as possible for all covered accounts. Their goal is to do so within 2 business days of failure, however their mandate is "as soon as possible” for any specific failure. The FDIC website also contains information about recently failed banks and provides a "bank finder” that will locate FDIC-insured institutions based on selected criteria.
As the current economic crisis has taught us, it is best to be well-informed about all your financial decisions; investments and deposits included. Choose an FDIC member bank and if in doubt about any of the details, ask your banker or contact the FDIC directly!
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