Sep 17th, 2008

The FDIC: What It Is and Why You (Might) Need It

By David Weliver

The Federal Deposit Insurance Company (FDIC) is a division of the United States government that insures bank deposits up to $100,000 each. The FDIC was founded after the Great Depression, when many troubled U.S. banks failed under economic pressures and the additional weight of panicking customers simultaneously demanding their funds. Usually, consumers like you and me never think twice about whether the money we put into our bank accounts will be there tomorrow. But today we do.

Why might your bank fail? Banks earn profits by taking the money we deposit and investing it. Banks invest in securities like stocks, but also in loans like mortgages and credit cards. As you have read, banks made way too many risky mortgage loans in the last decade. Consumers cannot repay those loans, and banks are not recouping their investments. As the overall stock market struggles, banks are losing money on other investments, too.

As this trend continues, some banks will no longer have money to lend, meaning they cannot earn additional profits and, ultimately, may not have enough cash settle depositors’ accounts.

How to protect yourself: Never keep more than $100,000 in cash at any one bank. If you are married, you can safely keep up to $200,000 in a joint account. If the worst happens and your bank fails, check with the FDIC for instructions on how to recover your funds. Don’t panic. Although today’s economic climate is straining all financial institutions—including the FDIC—the government will ensure that the FDIC can meet obligations for the foreseeable future.

On the downside, the FDIC is taxpayer-supported. Should it begin paying out depositors at an unusually large number of banks, we may all may see tax hikes down the road.

Related Posts

1. IndyMac Closing: Lessons from a Failing Bank
2. Stocks Plunge on Lehman, Merrill Failures: What Does It Mean for You?
3. Credit Unions: Non-Profits Offer a Great Alternative to Banks
4. Online Savings Accounts Provide Benefits Beyond Yield
5. Four Lessons from the 2008 Financial Crisis

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