Question

2-Explain the development of the FDIC, under what act was is created and why? Discuss how an individual might maximize their FDIC coverage. What changes did the FDIC implement after the recent financial crisis?

Answer 1

1. The Federal Deposit Insurance Corporation (FDIC) is a United States government corporation providing deposit insurance to depositors in US banks. The FDIC was created by the 1933 Banking Act during the Great Depression (June 16, 1933) to restore trust in the American banking system; more than one-third of banks failed in the years before the FDIC's creation, and bank runs were common. The insurance limit was initially US $2,500 per ownership category. Since the passage of the Dodd–Frank Wall Street Reform and Consumer Protection Act in 2011, the FDIC insures deposits in member banks up to US $250,000 per ownership category.

The FDIC and its reserves are not funded by public funds; member banks' insurance dues are the FDIC's primary source of funding. The FDIC also has a US$100 billion line of credit with the United States Department of the Treasury. Only banks are insured by the FDIC; credit unions are insured up to the same insurance limit by the National Credit Union Administration, which is also a government agency.

As of 2016, the FDIC insures deposits up to $250,000 per depositor as long as the institution is a member firm.

As of May 1, 2017, the FDIC provided deposit insurance at 5,844 institutions. The FDIC also examines and supervises certain financial institutions for safety and soundness, performs certain consumer-protection functions, and manages receiverships of failed banks.

2. To maximise the coverage, an individual should deposit money at different banks. This is because, norms specify that FDIC insurance limit of $250,000 is per ownership category at each bank. Another way is to open accounts in different ownership categories at the same bank. Therefore, a person can have:

• A personal account with $250,000
• A corporate account with $250,000
• A trust account with $250,000
• A joint account with his/her spouse for $500,000 ($250,000 for each person)

3. In 2008 (during financial crisis), FDIC created a Temporary Liquidity Guarantee Program (TLGP) to strengthen confidence and encourage liquidity in the banking system by guaranteeing newly issued senior unsecured debt of banks, thrifts, and certain holding companies, and by providing full coverage of non-interest bearing deposit transaction accounts, regardless of dollar amount. The deposit insurance limit was temporarily raised from $100,000 to $250,000.