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 $250,000. The agency also identifies and monitors risks to its deposit insurance funds and tries to limit the effects on the U.S. 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 U.S. 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 Walmart from getting into the banking business.
The Federal Deposit Insurance Company (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 U.S. 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.
The FDIC began extending its coverage for deposits on January 1, 1934. On July 5, 1934, Lydia Lobsiger received the first-ever federal deposit insurance disbursement, after the Fon Du Lac State Bank, in East Peoria, Illinois, failed.
To avert any future banking catastrophes, Congress held a series of hearings 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.
As the U.S. financial crisis grew in 2008, the FDIC took over 25 U.S. banks that had become insolvent, including Washington Mutual, which was that year’s largest bank failure. Additionally, the government injected $20 billion into faltering Citigroup.
In 2009, the FDIC began its Legacy Loans Program initiative, which helped banks remove its toxic assets in order to raise new funding and increase loan availability. The first bank takeover by a foreign financial institution occurred in August when BBVA Compass, the U.S. division of Spain’s second-largest bank, took over the insolvent Texas-based Guaranty Bank. The FDIC split Guaranty’s losses on 11 billion loans with BBVA, which costs FDIC $3 billion. By year’s end, 552 banks were classified as troubled, including 140 insolvent.
That same year, Bank of America was rescued with a $20 billion bailout.
In 2010, 157 banks with $92 billion in holdings collapsed, and FDIC employed emergency powers to take over three banks in Puerto Rico, costing the agency $5.3 billion. Its list of troubled banks stood at 775 with a total of $431 billion assets.
As of mid-2010, while weathering the largest number of banking failures in over two decades, the FDIC held a reserve in its Deposit Insurance Fund of negative $20 billion, while holding $19 billion in U.S. Treasury securities and cash, with a $30 billion line of credit. It is also permitted to borrow up to $500 billion from the U.S. Treasury. The FDIC projects that its funds won’t be replenished to the statutory minimum level until 2017.
In 2011, 34 banks failed, costing the FDIC $588.1 million.
The Federal Deposit Insurance Company (FDIC) mitigates any potential damage to the United States economy by insuring deposits made to banks and other financial institutions. Savings, checking, individual retirement accounts (IRAs) and other deposit accounts (when combined) are insured up to $250,000 per depositor.
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 U.S. government, such as U.S. 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 U.S. Treasury securities.
The FDIC oversees approximately 7,760 banks and savings banks. This is more than half of the financial institutions in the American banking system. Although 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 D.C., 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 Walsh and John E. Bowman.
From the Web Site of the Federal Deposit Insurance Corporation
The FDIC provides a list of its contractors for a variety of services, including management and marketing, securities financial advisory, appraisals, and data management. It also provides a breakdown of its 2011 contractors that are minority- and women-owned businesses. Among the contractors that FDIC has used are:
I Infinite Software which, in May 2008, 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.
First Financial Network (FFN) was awarded the Internet Marketing and Support Services contract by the FDIC in January 2008. 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.
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.”
The Federal Deposit Insurance Company provides no information regarding payments to contractors through the federal website, USASpending.gov.
FDIC Requests Overturning $72.3 Million Fee for Bullying
In August 2007, the San Francisco Chronicle reported that the Federal Deposit Insurance Company (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 Hurwitz 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
FDIC asks appeals court to drop $72.3 million fine (Tom Abate, San Francisco Chronicle)
Walmart Pulls Out of the Banking Business
In March 2007, the FDIC revealed that superstore Walmart had dropped its plans of opening a specialty bank. Walmart 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 Walmart’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.
Fed resists retailers' ownership of banks (by Damian Paletta, Dow Jones)
House Adopts Measure to Bar Commercial Ownership of ILCs (White & Case LLP)
Nader Charges Many Banks Enjoying Free FDIC Coverage
In a March 2, 2002, post on his Web site, 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)
Eliminate or Expand the FDIC?
Having insured bank deposits since the Depression, the Federal Deposit Insurance Corporation (FDIC) has outlived its usefulness, according to some banking experts. Others, though, not only want it to stick around, but expand its mission.
Peter Atwater, who helped build JP Morgan’s securitization business during the late 1980s and early 1990s, wants to eliminate the FDIC. Atwater thinks doing so will promote bank stability, by removing the industry’s security blanket and encouraging it to be more responsible. As long as the FDIC is around, “depositor due diligence is non-existent.”
Meanwhile, Amar Bhide, the Thomas Schmidheiny Professor at the Fletcher School of Law and Diplomacy, wants the government to remove the $250,000 limit on FDIC insurance, so that banks can insure deposits made by corporations and wealthy investors.
Peter Atwater Suggests Eliminating FDIC as Part of Banking Reform (by Sam Cass, Best Cash Cow)
Should FDIC Insurance Be Unlimited? (By Claes Bell, Bankrate.com)
FDIC Places Undue Burden on Taxpayers, Says Cato Report
An April 2002 Cato Foundation report warned against the FDIC’s policy of requiring taxpayers to be responsible for bank failures in funding losses. The report suggested a series of reforms, including tying FDIC premiums to risk, charging all insured institutions premiums, and indexing the deposit insurance coverage level to reflect its real value.
FDIC Reform: Don't Put Taxpayers Back at Risk (George G. Kaufman, Cato Foundation) (pdf)
A six-year board member of the Federal Deposit Insurance Corporation, Martin J. Gruenberg was nominated to be chairman of the FDIC by President Barack Obama in June 2011. He will function as acting chairman until his confirmation vote in the Senate.