Federal Deposit Insurance Corporation

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Headquarters of the Federal Deposit Insurance Corporation, Washington, D.C.

Federal Deposit Insurance Corporation, Washington, D.C.; photo provided by FDIC.

Federal Deposit Insurance Corporation, a U.S. government agency created under the Banking Act of 1933 (also known as the Glass-Steagall Act). The primary role of the FDIC is to insure and protect bank depositors’ funds against loss in the event of a bank failure. The FDIC also plays a critical role in regulating banking practices.

The FDIC was created in the wake of the Great Depression, a time when 9,000 banks went out of business, resulting in the loss of approximately 9 million savings accounts. The FDIC became a permanent government agency through the Banking Act of 1935 after many state-sponsored deposit insurance plans proved to be unsuccessful.

The FDIC generates its income from fees charged to insured banks and savings associations. The FDIC’s bank fees are based on a bank’s deposit amounts. After deducting funds for losses and corporate expenses, banks are allowed a credit for two-thirds of their annual payment to the FDIC.

FDIC insurance currently insures up to $250,000 per depositor per institution. This amount has been revised several times since the agency’s founding. In 1934 the FDIC insured up to $5,000 per account. By 1980, the limit had increased to $100,000. In 2008 it was temporarily increased to $250,000, the current insurance limit. This limit became permanent in 2010.

The exact process is case-specific, but the first step is typically to pay out all insured depositors as soon as possible, and seek a so-called “orderly liquidation.” This could include searching for another bank to acquire its assets, or the FDIC may set up a separate holding company to act as receiver during the wind-down.

For example, subsequent to a rapid rise in interest rates, coinciding with a sell-off in technology shares, in March 2023 Silicon Valley Bank, a key banking institution for start-ups and venture capital firms, underwent a bank failure and was immediately shut down by state regulators. According to SVB’s February 2023 10-K filing, about 90% of SVB’s funds were in excess of the $250,000 limit and thus uninsured.

The FDIC transferred all of SVB’s FDIC-insured funds to a newly-created banking facility for depositors to access their funds. Initially, the facility agreed to limit the access to insured funds, with uninsured funds frozen until the FDIC could sell SVB’s remaining assets. However, fear quickly spread to other regional banks, which saw depositors scrambling to withdraw funds. Fearing a systemic run on all small, regional banks, the FDIC decided to extend access to all SVB deposits, including uninsured deposits.

In other words, although the official insured limit is $250,000 per account, the FDIC’s chief mandate is to maintain confidence and stability in the banking system. Depending on the severity of a bank failure, the FDIC may choose to extend the limit.

From 1933, all banks that are members of the Federal Reserve System have been required to insure their deposits. Other banks (around half of all banks in the U.S.) are allowed to do so if they meet FDIC standards. Almost all incorporated commercial banks in the United States participate in the plan.

The FDIC is managed by a board of five directors who are appointed by the U.S. president. The five board positions are chairman, vice chairman, director, comptroller of the currency, and director of the Office of Thrift Supervision.