Protection of Funds

The Federal Deposit Insurance Corporation (FDIC)

The Federal Deposit Insurance Corporation is an independent agency whose mandate is to maintain stability and public confidence in financial system.

Learning Objectives

Discuss the history and role of the FDIC

Key Takeaways

Key Points

  • The FDIC promotes public confidence in the U.S. financial system by insuring depositors for at least $250,000 per insured bank.
  • The FDIC receives no Congressional appropriations; it is funded by premiums that banks and thrift institutions pay for deposit insurance coverage and from earnings on investments in U.S. Treasury securities.
  • The FDIC insures deposits only. It does not insure securities, mutual funds, or similar types of investments that banks and thrift institutions may offer.
  • The FDIC was created in 1933 in response to the thousands of bank failures that occurred in the 1920s and early 1930s.

Key Terms

  • FDIC: The Federal Deposit Insurance Corporation (FDIC) is a United States government corporation operating as an independent agency that provides deposit insurance, which guarantees the safety of deposits in member banks, up to $250,000 per depositor per bank.

The Federal Deposit Insurance Corporation (FDIC)

The Federal Deposit Insurance Corporation (FDIC) is an independent agency created by the Congress to maintain stability and public confidence in the nation’s financial system by insuring deposits, examining and supervising financial institutions for safety and soundness and consumer protection, and managing receiverships. The FDIC promotes public confidence in the United States financial system by insuring depositors for at least $250,000 per insured bank. This is accomplished by identifying, monitoring, and addressing risks to the deposit insurance funds and by limiting the effect on the economy and the financial system when a bank or thrift institution fails.

An independent agency of the federal government, the FDIC was created in 1933 in response to the thousands of bank failures that occurred in the 1920s and early 1930s. Since the start of FDIC insurance on January 1, 1934, no depositor has lost a single cent of insured funds as a result of a failure. The FDIC receives no Congressional appropriations; it is funded by premiums that banks and thrift institutions pay for deposit insurance coverage and from earnings on investments in U.S. Treasury securities. The FDIC insures more than $7 trillion of deposits in U.S. banks and thrifts—deposits in virtually every bank and thrift in the country.

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FDIC: The Federal Deposit Insurance Corporation (FDIC) is an independent agency created by the Congress to maintain stability and public confidence in the nation’s financial system.

United States banks and credit unions are closely regulated and supervised to ensure that consumer money is safe. Banks and credit unions are required to comply with regulations.The Federal Deposit Insurance Corporation (FDIC) insures deposit accounts for banks and the National Credit Union Administration for credit unions.

In order to counter banks that engage in excessive risk taking, programs were developed for early intervention. The FDIC Improvement Act of 1991 limits regulators’ discretion as to when to close troubled financial institutions (FIs). It requires that troubled FIs be recognized long before they become insolvent. For example, within 90 days of detection, critically undercapitalized FIs with tangible equity of less than 2% of assets must be placed in conservatorship or receivership. Public FIs can also utilize specific regulations to reallocate portfolios in ways that are deemed to be financially sound and socially beneficial. A good example is the prohibition against lending more than 10% of a bank’s capital to any one borrower.

The National Credit Union Administration (NCUA)

The NCUA is the independent federal agency created by the U.S. Congress to regulate, charter, and supervise federal credit unions.

Learning Objectives

Describe the NCUA and its role in the United States

Key Takeaways

Key Points

  • As the insurer and regulator of Federally chartered credit unions, the NCUA oversees credit union safety and soundness, much like the FDIC.
  • To protect against the failure of credit unions, NCUA implemented a 12-month examination cycle for federally insured credit unions to detect problems in individual credit unions before they became insurmountable.
  • The NCUA is governed by a three-member board appointed by the President of the United States and confirmed by the United States Senate. The president also chooses which member will serve in the position of chairman.

Key Terms

  • NCUA: The National Credit Union Administration (NCUA) is the independent federal agency created by the U.S. Congress to regulate, charter, and supervise federal credit unions.

The National Credit Union Administration (NCUA)

The National Credit Union Administration (NCUA) is the United States independent federal agency that supervises and charters federal credit unions. NCUA also insures savings in federal- and most state-chartered credit unions across the country through the National Credit Union Share Insurance Fund (NCUSIF), a federal fund backed by the full faith and credit of the United States government. The chartering of credit unions in all states is due to the signing of the Federal Credit Union Act by President Franklin D. Roosevelt in 1934 as part of the New Deal. The federal law sought to make credit available and promote thrift through a national system of nonprofit, cooperative credit unions.

At first, the newly created Bureau of Federal Credit Unions was housed at the Farm Credit Administration. Responsibility for regulation would shift over the years as the agency migrated from the Federal Deposit Insurance Corporation to the Federal Security Agency, then to the Department of Health, Education, and Welfare.

As the insurer and regulator of federally chartered credit unions, the NCUA oversees credit union safety and soundness, much like the FDIC. It is sometimes required to place credit unions in conservatorship. On March 20, 2009, during the financial crisis of 2007–2010, the NCUA took over the two largest corporate credit unions with combined assets of $57 billion because of the losses on their investments in mortgage-backed securities.

The National Credit Union Share Insurance Fund (NCUSIF) is the federal fund created by Congress in 1970 to insure member’s deposits in federally insured credit unions. On July 22, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law and included permanently establishing the NCUA’s standard maximum share insurance amount at $250,000. All deposit insurance resources reflect this higher level of coverage. Credit unions may also offer an array of additional financial services which are not covered by federal insurance.

The Savings Association Insurance Fund (SAIF)

Between 1989 and 2006, there were two separate FDIC funds–Bank Insurance Fund (BIF), and Savings Association Insurance Fund (SAIF).

Learning Objectives

Explain why the Bank Insurance Fund and the Savings Association Insurance Fund were merged into the Deposit Insurance Fund

Key Takeaways

Key Points

  • 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.
  • In February 2006, President George W. Bush signed into law the Federal Deposit Insurance Reform Act of 2005 (FDIRA), which resulted in the merging of the Bank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF) into a new fund, the Deposit Insurance Fund (DIF).
  • Bank failures typically represent a cost to the DIF, because the FDIC, as receiver of the failed institution, must liquidate assets that have declined substantially in value while, at the same time, making good on the institution’s deposit obligations.

Key Terms

  • SAIF: One of the two FDIC fund between 1989 and 2006, after which it merged with the Bank Insurance Fund to form the Deposit Insurance Fund in 2006

Between 1989 and 2006, there were two separate FDIC funds—the Bank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF). The latter was established after the savings and 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. Alan Greenspan, Chairman of the Federal Reserve, was a critic of the system, saying, “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”.

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FDIC office in Arlington, VA: Between 1989 and 2006, there were two separate FDIC funds—the Bank Insurance Fund (BIF), and the Savings Association Insurance Fund (SAIF).

In February 2006, President George W. Bush signed into law the Federal Deposit Insurance Reform Act of 2005 (FDIRA),which contained 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 BIF and the 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.

Typically, bank failures represent a cost to the DIF because the FDIC, as receiver of the failed institution, must liquidate assets that have declined substantially in value while, at the same time, making good on the institution’s deposit obligations.