DEFINITION of 'FDIC Insured Account'

An FDIC Insured Account is a bank or thrift (savings and loan association) account that meets the requirements to be covered by the Federal Deposit Insurance Corporation (FDIC). The type of accounts that can be FDIC-insured include negotiable order of withdrawal (NOW), checking, savings and money market deposit accounts, as well as Certificate of Deposits (CD). The maximum amount that is insured in a qualified account is $250,000 per depositor, member institution. That means if you have up to that amount in a bank account and the bank fails, the FDIC makes you whole from any losses you suffered.

BREAKING DOWN 'FDIC Insured Account'

A qualified account has to be held in a bank that is a participant of the FDIC program. Participating banks are required to display an official sign at each teller window or station where deposits are regularly received. Depositors can verify whether a bank is an FDIC member through a search at Membership with the FDIC is voluntary, with member banks or funding the insurance coverage through premium payments. Credit union accounts may be insured for up to $250,000 if the credit union is a member of the National Credit Union Administration (NCUA).

FDIC Coverage and Limits

Basically, all demand-deposit accounts which become general obligations of the bank are covered by the FDIC. Accounts that do not qualify for FDIC coverage include safe deposit boxes, investment accounts (containing stocks, bonds, etc.), mutual funds and life insurance policies. Individual retirement accounts (IRAs) are insured to $250,000, as are revocable trust accounts, although coverage on a revocable trust extends to each eligible beneficiary.

FDIC guarantees deposits up to $250,000 per account per person. For joint accounts, each co-owner receives the full $250,000 of protection, so a joint account with $500,000 on deposit would be fully protected. Multiple accounts held in the same bank under the same account holder's name are added together for purposes of determining the amount of insured deposits, so a person with two accounts at the same bank totaling $300,000 would have $50,000 unprotected.

However, deposit limits are separate for each different bank, even for the same owner. Say John H. Doe has $200,000 at Bank A and an additional $150,000 at Bank B. Even though his total deposits exceed $250,000, he is considered fully covered as long as both banks are FDIC-insured. If he transfers the $150,000 to Bank A, he loses coverage on $100,000 since his total deposit at Bank A is now $350,000.

Purpose of the FDIC

The FDIC guards against bank failure in the United States. It was created as part of the Banking Act of 1933 after a four-year period that saw nearly 10,000 U.S. banks fail or suspend operations. Most of these closures resulted from a run on the bank; banks did not possess enough money in their vaults to meet depositors' withdrawal demands, so they had to close their doors, leaving many families without access to their savings. Its purpose was to restore the faith of panicked Americans following the Stock Market Crash of 1929 and the onset of the Great Depression.

Conceptually, the FDIC serves as a bulwark against future banking panics. The FDIC "insures," or guarantees, the value of all bank demand deposits up to a certain amount (which has grown since its inception: In October 2008, Congress increased the amount covered by FDIC deposit insurance from $100,000 to the current $250,000). Monitoring and addressing risks facing deposited funds, the FDIC today serves to maintain public confidence and encourage stability in the financial system through the promotion of sound banking practices.

According to the FDIC, no depositor has lost a cent of insured funds as a result of bank failure since its insurance debuted on January 1, 1934. If measured on the merits of preventing bank panics, the FDIC has been a resounding success. Detractors believe forced deposit insurance creates moral hazard in the banking system and encourages depositors and banks to engage in riskier behavior; after all, customers do not need to care which bank makes safer loans if the FDIC is going to bail them all out anyway. Nevertheless, the U.S. economy has not suffered a legitimate banking panic in the 80-plus years of the FDIC.

Understanding Fractional Reserve Banking

To understand how, and why, the FDIC functions, it is critical to understand how the modern savings and loan system works. Modern bank accounts are not like safety deposit boxes; depositor money does not go into an individualized vault drawer to wait idly until future withdrawal. Instead, banks funnel money from depositor accounts to make new loans because they want to generate revenue from the interest.

The federal government requires most banks to keep only 10% of all deposits on hand; the other 90% can be used to make loans. If you made a $1,000 bank deposit, your bank can actually take $900 from that deposit and use it to finance a car loan or a home mortgage. This creates a situation where one depositor has a claim to $1,000 in a savings account, while a borrower has a simultaneous claim to $900 in credit funds.

This is the private mechanism by which banks create new money in the economy, which economists sometimes refer to as the deposit multiplier. This kind of banking is called "fractional reserve banking," since only a small fraction of the total deposits are kept as reserves at the bank. Fractional reserve banking creates extra liquidity in the capital markets and helps keep interest rates low, but it can also create an unstable banking environment.

Bank Failures

Fractional reserve banking is vulnerable when too many depositors ask for their money back at the same time. A fractional reserve bank might only retain 10% of available deposits, but it is possible the bank's customers could simultaneously request more than 10% of their money back at any one time. When too many depositors ask for their money back, a so-called "bank run," the bank must turn away some customers empty-handed. Other depositors lose confidence and ask for their money back too, fearing they will not be able to recoup some of their savings.

Historically, bank runs have created a contagion-like effect that spreads to other banks. Otherwise-healthy banks might see runs by their depositors, leading to systemic bank panics. The United States has experienced several bank panics, most notably in 1907, which was a driving force behind the creation of the Federal Reserve in 1913, and again at the outset of the Great Depression.

In legal jargon, a bank only "fails" when it is closed by a federal or state regulatory authority. Outside of panics, this most likely occurs because the bank violates banking laws or makes erroneous financial decisions, such as bad loans or investments, and finds itself unable to meet deposit demands.

If an FDIC-insured bank cannot meet deposit obligations, the FDIC steps in and pays insurance to depositors on their accounts. Once declared "failed," the bank itself is assumed by the FDIC, which sells the bank's assets and pays off any debts owed. When a bank fails, account holders get their funds back almost immediately up to the insured amount. If their deposits exceed that limit, they will have to wait until the FDIC sells off the bank's assets to recoup any excess.

The FDIC Reserve Fund

Prior to 2006, the FDIC financed itself through the Bank Insurance Fund and the Savings Association Insurance Fund. These were basically composed of insurance premiums the FDIC charged to member banks for housing and safekeeping their funds.

President George W. Bush signed the Federal Deposit Insurance Reform Act of 2005 to merge the competing funds. As of 2015, all premiums are left in the Deposit Insurance Fund (DIF), from which all FDIC-insured deposits are covered.

The system has never been fully funded; in fact, the FDIC is normally short of its total insurance exposure by more than 99%. Congress granted the FDIC the power to borrow up to $500 billion from the Department of the Treasury, making the system effectively backed by the Federal Reserve. In other words. if the FDIC exhausts its other options, the government will step in to provide further financial backing.

The FDIC could also borrow money from the Treasury in the form of short-term loans. This occurred during the savings and loan crisis in 1991, when the FDIC was forced to borrow several billion dollars to cover the failing thrifts' accounts.

  1. Bank Insurance

    Bank insurance is a guarantee by the Federal Deposit Insurance ...
  2. Federal Deposit Insurance Corporation ...

    The Federal Deposit Insurance Corporation (FDIC) is an independent ...
  3. Niche Banks

    Niche banks cater to and serve the needs of a certain demographic ...
  4. Modified Payoff

    A modified payoff is a partial insurance reimbursement that is ...
  5. Assisted Merger

    Assisted merger is the bringing together of two or more financial ...
  6. Foreign Deposits

    Foreign deposits are deposits made at, or money put in to, domestic ...
Related Articles
  1. Investing

    Mutual Funds Are Not FDIC Insured: Here Is Why

    Find out why mutual funds are not insured by the FDIC, including why the FDIC was created and how to minimize your risk with educated mutual fund investments.
  2. Investing

    FDIC Sues Bank of America Over Deposit Insurance

    In a lawsuit filed Monday, the FDIC says Bank of America owes at least $542 million for deposit insurance.
  3. Personal Finance

    Are Your Bank Deposits Insured?

    Learn how the FDIC is helping to keep your money in your pockets.
  4. Small Business

    A New Plan To Prevent Future Bailouts

    This new and innovative plan by the FDIC could help the government avoid the next bailout.
  5. Insights

    Financial Regulations: Glass-Steagall to Dodd-Frank

    Here are some of the most important financial regulations that have been established.
  6. IPF - Banking

    Which Banks Pay the Highest Interest Rates on Savings Accounts?

    Online banks offer the best savings account interest rates. Not all banks offer the same features, so it pays to read the fine print.
  7. Personal Finance

    The 7 Best Places to Put Your Savings

    You work hard to put your money away for the future, but where should you keep it?
  8. Investing

    Introduction To The Chinese Banking System

    As China steps into a greater role in the global economic system, their banking system continues to evolve.
  1. Why is my 401(k) not FDIC-Insured?

    Learn about the Federal Deposit Insurance Corporation (FDIC) and whether its protection extends to 401(k) accounts or just ... Read Answer >>
  2. Are 401ks FDIC insured?

    Learn what part of your 401(k) retirement plan is covered by FDIC insurance, and what part is not. Find out what happens ... Read Answer >>
  3. Why are mutual funds not FDIC-insured?

    Discover why mutual funds are not insured by the FDIC, and learn what protection is offered for these and other similar financial ... Read Answer >>
  4. Does the FDIC cover identity theft?

    Learn whether or not identify theft is covered by the FDIC, and find out what steps you can take to prevent or report identity ... Read Answer >>
  5. Why would you keep funds in a money market account and not a savings account?

    Read about the differences between money market accounts and savings accounts, and see why a depositor would elect a money ... Read Answer >>
Trading Center