The FDIC and What To Know About It

Ever wondered what the acronym "FDIC" stands for? Anyone who banks with a federal savings bank or a community financial institution, has likely seen a placard in the lobby of a local branch that says "Federally insured by the FDIC."

While the acronym is familiar, most people don’t know what the FDIC is, or more importantly how it affects their accounts. The FDIC is a federal agency known as the Federal Deposit Insurance Corporation. The FDIC’s main purpose is to provide insurance for most individuals who hold a deposit account (e.g. Checkings, Savings, Certificates of Deposit (CDs), and other money market deposit accounts) with a traditional bank. Typically, FDIC insures up to $250,000 per depositor, per insured bank, for each account ownership category, according to the agency. That means that those with more than $250,000 in savings accounts may want to consider depositing in multiple banks, to take advantage of FDIC coverage.

Similarily, credit unions that offering banking products such as checking accounts, CD’s, and other deposit accounts are insured to $250,000 per depositor, per insured credit union, for each account ownership category, according to the National Credit Union Administration (NCUA).

FDIC is a product of the Great Depression. After the passage of the Banking Act of 1933, the FDIC was founded and authorized to operate as a fail-safe mechanism that would provide financial safety nets to prevent banks from closing. During the Great Depression, a total of one-third of the country’s banks failed after people panicked and withdrew all of their money from the banks. The logic of Congress and the President Franklin Delano Roosevelt (a.k.a. FDR) administration was to insure funds for citizens so that circulation of funds and the integrity of the banking system can stay strong.

Basically, the FDIC was created as a run-of-the-mill consumer protection entity. That means that consumers can deposit their funds with a banking institution with peace of mind and confidence, that even in the event of bank failure, they will still have access to their money. The insurance also gives banks a controlled environment–even one tied to FDIC’s regulations of this segment of the financial industry–to address market and growth issues. In consequence, the likelihood of a massive banking failure, or a "run of the bank" is dismal compared to pre-FDIC years.

Keep in mind that investment products and other financial accounts that don’t require the traditional deposit aren’t insured by the FDIC or the NCUA. Instead, mutual funds annuities, life insurance policies, stocks, and bonds are not eligible for FDIC insurance. Individual retirement accounts (IRAs) and Roth IRAs could be subject to certain FDIC protections; however, not all of these products are insured fully.