The ABC's of FDIC

You almost certainly see the common words “Member FDIC” when you walk into your bank or financial institution, and this probably gives you some confidence in the handling of your money… as well it should. Most people in the United States take as a given that their money will be protected when in a bank account, but what exactly is FDIC and how exactly are your funds protected? Equally as important, which of your funds are not protected?

FDIC stands for Federal Deposit Insurance Corporation. Contrary to most bankers’ beliefs, FDIC is not an official government department, but rather an independent agency of the federal government. Its role in the American banking system was established through the Glass-Steagall Act of 1933, which was designed to ease citizens’ fears of depositing money. Prior to this, many unfortunate individuals found that they could not necessarily obtain the money that they once had deposited, due to banking failure.

Consequently, FDIC insures deposits against banking failure, up to $100,000 per account owner (both consumers and businesses) at member banks. Additionally, FDIC insures up to $250,000 per IRA. Almost all banks in the U.S. are FDIC members, which means that they must meet strict requirements pertaining to asset liquidity and reserves.

FDIC representatives frequently monitor banks to ensure that FDIC standards and met, and apply one of the following labels to each financial institution: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, or critically undercapitalized. Once a bank is considered undercapitalized, it is warned that it must improve in order to retain FDIC membership.

Prior to the 1980s, deposits made in Savings and Loans (S&Ls) were protected not under FDIC, but under FSLIC (Federal Savings and Loan Insurance Corporation) instead. FSLIC declared bankruptcy, however, so nowadays S&L deposits are insured under FDIC as well. Deposits at most credit unions, however, are insured under the National Credit Union Administration up to $100,000.


What is insured?

It must be noted that not all of the money present in your bank is protected, however. Consider the original intent of FDIC: to protect against banking failure. It follows then that your funds only are protected under FDIC from banking failure and not from other causes of loss. FDIC does not insure your funds against theft, fraud, or account errors, although your bank likely has protections in place for such causes.

The types of accounts that are insured under FDIC when it comes to bank failure include traditional savings accounts with which you may deposit or withdraw money as you please, checking accounts, checking accounts that acquire interest, certificates of deposit (CDs), money market deposit accounts (MMDAs), cashiers’ checks, and interest checks.

Accounts that are not considered deposit accounts, and so are not insured under FDIC, include mutual funds (including money market mutual funds), stocks, bonds, insurance or annuity products, items kept in a safe deposit box, and anything that is backed by the U.S. government like savings bonds.

In addition, some types of investments may be only partially protected. If you have an investment account with unique terms and conditions, for example, then FDIC might cover your principal investment but not the interest on your account. Ask your personal banker if you have any concerns in this regard.

The 100K Limit

The $100,000 limit insured by FDIC applies to a single account holder (individual or business) at a specific bank across the board on one’s accounts. This means that if you have $40k in a checking account and $120k in a savings account at the same bank, then only $100k will be insured by FDIC. There are ways to protect more than $100k, however.

The $100k limit refers to specific account ownership, so if you have one account by yourself and one joint account, then you could have up to $200k insured under FDIC. Other account ownership types that provide you with the same opportunity include beneficial ownership and trust accounts. Furthermore, you could have deposit accounts at more than one bank to get past this limit.