The Federal Deposit Insurance Corporation (FDIC) is an independent agency of the federal government responsible for insuring deposits made by individuals and companies in banks and other thrift institutions. The FDIC insures deposits up to $100,000. The agency also identifies and monitors risks to its deposit insurance funds and tries to limit the effects on the US economy if a bank of thrift institution should fail. The FDIC is funded through premiums paid by banks and thrift institutions to pay for deposit coverage and from interest the agency earns on US Treasury securities. Recent bank failures stemming from the mortgage crisis have drawn attention to the FDIC as it has tried to reimburse depositors. It also has come under criticism from those on both the left and right for its work, which has included restrictions that kept retail giant Wal-Mart from getting into the banking business.
The Federal Deposit Insurance Corporation (FDIC) was created in 1933 as a way to mitigate the damage caused by thousands of bank failures stemming from the stock market crash of 1929 and other risky investments. Nervous investors, worried about losing their life savings, began to withdraw money from banks all across the nation. In many cases, this led to bank failure, as institutions simply ran out of money.
To help calm fears and bring some stability, President Franklin D. Roosevelt ordered a four-day bank holiday on March 6, 1933, during which US banks were shut down to undergo inspections. Then, the President addressed the banking crisis in a speech of March 12, 1933 to reassure worried Americans. On June 16, President Roosevelt signed the Banking Act of 1933 (also known as the Glass-Steagall Act) which helped to form the FDIC, which was placed under the jurisdiction of the Federal Reserve.
To avert any future banking catastrophes, Congress held a series of hearing related to the Federal Deposit Insurance Act of 1950. Many, including Jesse Jones (former head of the Reconstruction Finance Corporation) felt that the $1 billion held by the FDIC was enough to cover any financial issues. Bankers agreed, for the most part, and by 1950, the deposit insurance fund reached over $1.2 billion. Although bank deposits were growing after World War II, interest rates were low, and bank earnings lagged as a result. At the same time, prices increased across the board and deposit insurance expenses went up.
The Federal Deposit Insurance act of 1950 lowered FDIC deposit insurance charges to ease pressure on banks. But rather than lowering the basic assessment rate, the overall reduction was made through rebates. The FDIC would keep 40% of income and the remainder would be refunded to banks, meaning that the risk would be shared 60-40 between the banks and the FDIC.
Additionally, the 1950 legislation required the FDIC to reimburse the Treasury Department for any interest on initial capital contributions. The FDIC paid about $81 million to the Treasury. The legislation also removed the FDIC from the Federal Reserve Act’s jurisdiction and placed it under a separate body of law called the Federal Deposit Insurance Act. Although this has proved to be largely a symbolic act, it does stress the separate nature of the FDIC.
In 1960, net assessments on banks were reduced again. The rebate percentage increased, to 66.66%, giving the FDIC a larger share of the risk in the event of a bank’s failure.
The first $100 million loss for the FDIC was in 1971, when the $109 million Birmingham Bloomfield Bank, located in a suburb of Detroit, failed. The institution had invested in long-term mutual funds, leaving it vulnerable to increases in interest rates. When the bank’s securities depreciated, the bank became insolvent.
Additionally, there were 17 bank failures between 1971 and 1974. They were the first relatively large losses incurred by the FDIC. Adding to the trouble was increased competition among banks and a troubled economic climate. Rising inflation and oil prices made matters even worse.
A recession in 1973-1975 led to problems with real estate loans, and bank failures remained high, peaking at 16 closures in 1976.
The years 1981 and 1982 saw much greater losses, which combined for approximately 74% of assessment income. Another recession, in 1981-1982, was severe. High unemployment and business failures, combined with a poor economy, caused 42 banks to fail in 1982. This included mutual savings banks. Although the economy began to improve in 1983, 27 banks failed during this period.
In February 2006, President George W. Bush signed the Federal Deposit Insurance Reform Act of 2005 into law. This legislation merged the Bank Insurance Fund (BIF) with the Savings Association Insurance Fund (SAIF). The new fund was known as the Deposit Insurance Fund (DIF) and was made effective on March 31, 2006.
At the end of 2007, the DIF had a balance of $52 billion. Bank failures in 2008, including California’s IndyMac, forced the DIF’s balance downward, to approximately $45.2 billion. This decline caused the reserve ratio to fall to 1.01%, down from 1.19% in the previous quarter. Once this ratio, figured by dividing the fund’s balance by the number of insured deposits, falls below 1.15%, the FDIC must, by law, develop a plan to replenish the fund.
Currently, the FDIC has an insurance fund totaling more than $49 billion and insures more than $3 trillion in deposits across the country.
A History of the FDIC 1933-1983
(FDIC)
The Federal Deposit Insurance Corporation (FDIC) mitigates any potential damage to the United States economy by insuring deposits made to banks and other financial institutions. Savings, checking and other deposit accounts (when combined) are insured up to $100,000 per depositor. Deposits held with other people, such as joint accounts, may be insured separately. The FDIC also provides separate insurance coverage for retirement accounts, including individual retirement accounts (IRAs) and Keoghs, up to $250,000.
The FDIC does not insure securities, mutual funds or similar investments, such as stocks, money market accounts and bonds. It does not cover investments backed by the US government, such as US Treasury securities, contents of safe deposit boxes, accounting errors, or losses due to theft or fraud at an institution. Lastly, the FDIC does not provide insurance coverage to insurance and annuity products, such as life, auto and homeowner’s insurance.
The FDIC identifies and monitors risks to its own deposit insurance funds. These funds are accumulated through premiums paid by banks that receive the FDIC’s deposit insurance and from interest earned on US Treasury securities.
The FDIC oversees approximately 5,250 banks and savings banks. This is more than half of the financial institutions in the American banking system. Alhough the FDIC is the primary federal regulator of the banks chartered by states, it is also a back-up supervisor for remaining insured banks and thrift institutions.
When a bank fails, the FDIC has several options to help solve a failed bank’s financial problems, but the most popular remedy is to sell deposits and loans of the failed institutions to another institution. Customers of the old institution become customers of the new institution and can access their money in this way.
The FDIC has several components that help to achieve its goals. The FDIC Advisory Committee on Economic Inclusion (ComE-IN) was established by Chairman Sheila C. Bair and the FDIC Board of Directors pursuant to the Federal Advisory Committee Act and chartered in November 2006. The committee was formed to provide the FDIC with advice and recommendations on banking policies and initiatives, especially as they relate to underserved populations. This may include reviewing basic retail financial services, such as check cashing, money orders, remittances, stored value cards, short-term loans, savings accounts and other services that promote saving and investing.
The FDIC also has an Office of International Affairs that helps the agency address global financial issues, especially those of importance to the deposit insurance system. This office provides technical assistance, training and consulting services to foreign deposit insurers, bank supervisors and resolution authorities.
The FDIC is headquartered in Washington, DC, and has eight regional and field offices around the country, in Atlanta, Boston, Chicago, Dallas, Kansas City, Memphis, New York and San Francisco.
The agency is managed by a five-person
Board of Directors
, all of whom are appointed by the President and confirmed by the Senate. No more than three can be from the same political party. Currently, they are:
Sheila C. Bair, Martin J. Gruenberg, Thomas J. Curry, John C. Dugan and John M. Reich.
In May 2008, Infinite Software won an FDIC contract to provide software, support and services to make the FDIC’s business processes more effective. The financial details of the contract were not released.
In April 2008, Emcor Group, Inc. received a consolidated facilitates management contract for the FDIC’s offices in Washington, DC, and Arlington, Virginia. The contract is for three years and is worth $27 million.
In January 2008, First Financial Network (FFN) was awarded the Internet Marketing and Support Services contract by the FDIC. This contract requires FFN to market FDIC assets in receivership (those received from failed institutions and being readied for sale). Financial terms of the contract were not disclosed.
The Federal Deposit Insurance Company provides no information regarding payments to contractors through the federal website, USASpending.gov. However, the FDIC has issued contracts, including:
Dynamics Research Corp. (DRC) won a contract with the FDIC worth $29 million to provide business analysis and management support systems. The contract is for seven and a half years. DRC has been asked to “ promote, monitor and manage the FDIC’s system development projects to create a more efficient and effective deployment program.”
Perot Systems won a two-year, $4.2 million contract from the FDIC in 2004. The contract requires Perot Systems to support the Legal Information Management System used to identify, track and manage legal matters at financial institutions that FDIC oversees.
In 2004,
Advanced Technology Systems Inc. (ATS) won a $12.3 million contract from the FDIC to provide software development lifecycle support for the bank insurer’s administration division. The contract is for five years and will require ATS to enhance the FDIC’s systems through concept definition, feasibility studies, cost and benefit analysis, business process analysis, requirements analysis, functional and technical design, program coding, testing, documentation, data conversion, training, implementation and ongoing maintenance support.
FDIC Requests Overturning $72.3 Million Fee for Bullying
In August 2007, the San Francisco Chronicle reported that the FDIC had asked a New Orleans appeals court to overturn a ruling by a Texas judge in a case involving the agency’s “bullying” of financier Charles Hurwitz, whose Maxxam Corp. controlled Pacific Lumber. The FDIC had been ordered to pay a $72.3 million fine for supposedly browbeating Hurtwitz into selling old-growth redwood trees in public parks. The FDIC maintained that its investigation of Hurwitz was justified, going back to his days at Drexel Burnham Lambert, which had business dealings with United Savings, a Texas savings and loan that failed in 1988. United Savings cost taxpayers $1.6 billion
Wal-Mart Pulls Out of the Banking Business
In March 2007, the FDIC revealed that superstore Wal-Mart had dropped its plans of opening a specialty bank. Wal-Mart raised considerable controversy when it announced its plans in 2005. The retail giant said it was interested in providing financial services to its customers, but withdrew its application when it realized the process would take years, not months. A stumbling block for the giant retailer was federal legislation that imposed strict limitations on ownership of industrial loan companies (ILCs) and prohibited commercial firms deriving more than 15% of their gross revenues from activities that are not financial in nature. These moves were intended to prevent new banking enterprises from straining the FDIC’s safety net. The FDIC put a moratorium on approving any new ILC applications until January 31, 2008. Home Depot, another retail store, also had plans to launch its own ILC and was undeterred by Wal-Mart’s decision. Other companies that have tried to launch similar plans or have been scuttled in the past include General Motors, BlueCross BlueShield and a California credit union.
Nader Charges Many Bank s Enjoying Free FDIC Coverage
In a March 2, 2002, post on his website, consumer advocate Ralph Nader charged that giveaways by the Clinton Administration had led to many commercial banks enjoying free federal deposit insurance since 1995. FDIC’s decision to let banks drop premiums when the insurance fund’s reserve reached the minimum of 1.25% of insured deposits has come back to haunt the agency, Nader charged, because as banks continue to fail, the reserves are not replenished equally. This failure to pay premiums has resulted in a surplus of $5-6 billion annually, and although lobbyists had suggested that the savings would be passed along to consumers, bank fees have continued to rise each year.
FDIC Insurance Scam
(Ralph Nader, Nader.org)
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Founded: 1933
Annual Budget: $1.15 billion
Employees: 4,500
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Federal Deposit Insurance Corporation (FDIC)
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Sheila C. Bair has served as the 19th chairman of the Federal Deposit Insurance Corporation since June 26, 2006. Her appointment as chairman runs for a five-year term, and her membership on the FDIC Board of Directors continues through July 2013.
Bair received a BA from Kansas University and a JD from Kansas University School of Law.
She worked as research director, deputy counsel and counsel to Senate Majority Leader Robert Dole from 1981 to 1988 and commissioner and acting chairman of the Commodity Futures Trading Commission from 1991 to 1995.
Bair was Senior Vice President for Government Relations of the New York Stock Exchange from 1995 to 2000 and then served as Assistant Secretary for Financial Institutions at the US Department of the Treasury from 2001 to 2002.
In 2002, Bair was the Dean’s Professor of Financial Regulatory Policy for the Isenberg School of Management at the University of Massachusetts-Amherst. During this time, Bair also served on the FDIC’s Advisory Committee on Banking Policy.
Bair has also served as a member of several professional and nonprofit organizations, including the Insurance Marketplace Standards Association, Women in Housing and Finance, Center for Responsible Lending, NASD Ahead-of-the-Curve Advisory Committee, Massachusetts Savings Makes Cents, American Bar Association, Exchequer Club and Society of Children’s Book Writers and Illustrators. In 2008, Forbes ranked Bair the second most powerful woman in the world behind German chancellor Angela Merkel.
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