The Federal Deposit Insurance Corporation (FDIC) has been insuring depositors’ accounts since the Great Depression (1933). To date, it has never failed any depositors in U.S. banks. The FDIC was originally created by the U.S. government to reassure depositors that their hard-earned savings and deposit dollars would be protected.

Many dollars were lost during the Depression of the 1930s as numerous banks “failed” and had to be liquidated. The FDIC, funded by all member banks, exists to protect and guarantee depositors’ funds. Organized to promote public confidence in the U.S. banking system, over the years, their insurance fund has consistently grown, making the FDIC more stable.

Historically, the FDIC insures depositors up to $100,000 per insured account, not individuals. Therefore, people with multiple accounts can enjoy insurance exceeding $100,000 if they have legally separate accounts in the same bank. Responding to the deep recession of the first decade of the 2000s, the FDIC increased its insurance maximum to $250,000 per insured account.

The FDIC insures depositors’ balances (not individuals), but not any accrued but not posted interest thereon, up to their stated limits. Interest paid in prior periods, however, is covered, as this interest has become principal after posting. You can evaluate bank rates, CD rates, and other savings accounts with the security that your deposits are safe.

What the FDIC insures and what it doesn’t

The FDIC insures most typical bank accounts. Included in this coverage are:

  • Checking and other transaction accounts
  • Savings accounts of all varieties, including Money Market Accounts (MMAs)
  • Trust accounts
  • Certificates of Deposit (CDs), both regular and jumbo (over $100,000)
  • IRAs and other personal retirement accounts

The FDIC does NOT insure the following products, even if offered by your favorite bank or credit union:

  • Mutual funds
  • Annuities
  • Life insurance policies
  • U.S. Government securities (T-Bills, T-Securities, etc.)
  • Stocks, common or preferred
  • Bonds, including tax-free issues or government-issued bonds

Benefits and potential problems

The benefits of FDIC insurance are obvious. Your deposits are protected against loss, even if the bank that houses them ceases to exist. Even in the case of fraud or other felonies committed by or within your financial institution, your deposits are insured. You can then compare savings rates, compare money market rates, and all other standard bank products with confidence.

In most cases, your only risk is unposted interest at the time of receivership and FDIC takeover. For example, you have a savings account that earns daily interest that’s posted quarterly. The interest (or dividend, in some cases) is calculated on the last day of every third month and posted on the first day of the new quarter.

Your bank fails on the 29th of the third month of a quarter. You’ve earned interest for 2 months and 29 days, but it was not to be posted for three more days. Your FDIC insurance will pay up to your balance as of the 29th, eliminating any earned but unposted interest.

Another benefit arises because the FDIC insures “accounts,” not individual people. Should you have a checking account, savings account, MMA, and a CD at one bank, EACH account is insured up to $250,000. Therefore, you would be insured up to one million dollars, if you had your funds allocated equally in all four accounts. Unless you have many accounts, you can reach for the best bank rates without concern for safety if they’re FDIC insured.

While the FDIC is strong and sound, they’re not totally immune to risk. Although risks are very low, there is at least one scenario that could seriously tax their ability to fulfill their promises. First, you should understand how the FDIC works and how a typical intervention proceeds.

Assume a bank can no longer generate sufficient income or capital to continue operating. Once the FDIC believes a bank will fail, they commence discussions with other financial institutions about absorbing the deposits of the troubled bank. Other institutions usually are interested in assuming these deposits.

Often the same day FDIC regulators “seize” a failing bank, they announce that another institution has agreed to purchase all deposit accounts of the soon-to-be former bank. In most cases, the FDIC need invade their insurance fund for only the cost of accounting for and transferring these deposits.

The one risk that would be a “perfect storm” of disaster would involve a number of banks failing at the same time, including one or more of the largest national banks, with huge deposits. This scenario would decrease the number of institutions that were interested or able to purchase these deposits.

A disaster like this would probably also affect the decisions of other solvent institutions to assume large new savings dollars. While this has never happened or even been relatively close to happening, this perfect storm could occur at some point in the future, however unlikely.

Because of its 75-year history of protecting every depositor’s accounts, its strong insurance fund, and its close monitoring of all insured U.S. banks, the FDIC enjoys little risk. That means U.S. bank depositors also face very low risk of FDIC default, should their intervention be necessary.