The Federal Deposit Insurance Corporation (FDIC) is a U.S. Government regulatory agency that has three primary purposes:
- Insure bank deposits of member banks;
- Assist with banking regulations;
- Deal with failing banks.
Let's look at each of these jobs in a little more detail.
The FDIC does insure bank deposits in the United States, but it does not insure all banking products. Checking accounts, savings accounts, NOW accounts, Certificates of Deposit (CDs), and money market accounts are all considered deposited assets and are covered. The FDIC also covers financial vehicles such as IRAs and trusts (both revocable and irrevocable). However, non-deposited assets such as mutual funds, stocks, bonds and life insurance policies are not covered.
FDIC coverage is limited specifically to bank failures. The FDIC does not cover natural disasters, theft and other means of loss unrelated to bank failure, although most banks have their own policies to cover these types of losses.
While deposits are insured up to $250,000, there are ways to extend coverage. The $250,000 limit is per owner, per bank (including all branches of that bank, but excluding foreign branch accounts if payable solely outside the US, since the FDIC does not cover these funds at all). People can split their money into accounts at different banks to extend coverage, or divide it into multiple accounts under different ownership categories.
The ownership categories are Single, Joint, Revocable Trust, Irrevocable Trust, Qualifying Retirement Accounts, and Qualifying Employee Benefit Plans. Joint accounts cover $250,000 per owner and cannot name beneficiaries (otherwise, it is considered a trust). Revocable trusts are covered at $250,000 times the number of owners times the number of beneficiaries (up to five). Irrevocable trusts, retirement plans, and employee benefit plans are generally covered to $250,000 per individual, although there are exceptions. Visit the FDIC website at www.fdic.gov for qualification criteria. The website contains plenty of helpful advice along with EDIE The Estimator, a simple online method of calculating your overall FDIC coverage.
The FDIC is just one of multiple regulatory agencies that cover financial institutions; others include the Federal Reserve, the Securities and Exchange Commission (SEC), and the Office of the Comptroller of the Currency (OCC). The FDIC's role is to regulate federally insured depository institutions, including state-chartered thrift institutions and state banks that are not Federal Reserve System members.
If the FDIC decides that overall systemic risk is too high during institutional reviews, they may require action (such as debt guarantees) to insure stability.
Disposition of Failing Banks
The FDIC is also in charge of dealing with failed FDIC institutions. It is obligated to get the highest return possible for all shareholders and creditors to the extent possible. In addressing a failed bank, it performs resolution and receivership procedures.
During resolution, the institution's value is assessed and marketed to potential buying institutions. Bids are solicited, and the best bid to maximize return is accepted. FDIC also assists buying institutions with closing. If there's no buyer, FDIC pays out insured deposits to the limits discussed above.
Receivership is the liquidation process — running the failed institution through the closing process and liquidating and distributing assets. Any proceeds go toward creditors, uninsured depositors, claimants, as well as the FDIC.
FDIC also establishes coverage rules during bank transition periods. For example, it maintains $250,000 insurance coverage at both acquired and acquiring institutions for six months, and maintains separate accounts for CDs until maturity (with exceptions for CDs maturing during the six months transition period). In this period of bank fragility, it is wise to verify the coverage rules as they apply to any accounts you manage, as well as your own accounts.