FDIC: Definition, History & Purpose

Instructor: Christopher Prokes

Chris is an instructional designer and college faculty member. He has a Master's Degree in Education and also umpires baseball.

The Federal Deposit Insurance Corporation (FDIC) exists to protect the deposits of bank customers up to $250,000. In this lesson, learn how and why the FDIC began as well as its purpose. Conclude your lesson with a short quiz to test what you have learned.

Safeguarding Your Money

One of the main reasons banks exist is to hold and manage people's hard-earned money. Generally when customers deposit money into a bank, they don't think about it ever not being available for withdrawal. But at one point in time, deposits weren't guaranteed to always be available. During the Great Depression, many institutions went through bank failure and all of a sudden funds were not available. The federal government created the Federal Deposit Insurance Corporation (FDIC) to combat this problem in the future. Today, most banks are members of the FDIC and use it to protect the financial assets of their customers. FDIC might mean an abbreviation of a federal agency, but those letters can also be used to break down four key parts to know about the organization: Framework, Definition, Intention, and Coverage.

Framework: History of the FDIC

Think about money. Everyone wants as much of it as they can get. Money drives nearly everything in the world today. People earn it, spend it, and (hopefully) save it. What was the last thing you bought? When was the last time you went to the bank? You may have deposited funds into an account. You might have even withdrawn money. Heck, you might have even put money into a pre-pay mobile app or online service.

But there was a time when people couldn't have imagined mobile pay apps. This was a time when cash was king. Banks were visited by customers frequently to both put it in and take it back out. They always assumed that their money was available for their use.

In the 1920s, the country's economy was roaring, and so were people's bank accounts. At the end of the decade, though, things changed in a bad way. Enter the Great Depression. The reasons for this downturn are many; but that's another story. When the downturn started, people wanted to withdraw their funds from the bank to store at home (think of stuffing a mattress with bills like in old movies). This caused two problems. First, there was not enough cash on hand in banks to match the amounts customers had deposited. Second, banks were forced to then close and everything that people had deposited was gone.

Protesting a Bank Failure in New York City
Bank Protests

As such, people lost everything. And by that we mean EVERYTHING. Think about your account balance. Imagine that wiped out in an instant. Bank failures didn't just happen to your corner savings and loan; nearly 10,000 banks failed between 1929 and 1932. This was a big deal because approximately 1.3 BILLION dollars of deposits were lost. That's the equivalent of roughly 18 TRILLION dollars in 2015. Depressions and bank panics had occurred in the past, but not to this magnitude. Something had to be done!

Definition: What is the FDIC?

President Franklin D. Roosevelt (FDR) created his New Deal Program to get the country out of the Great Depression. Part of the New Deal was an attempt to address the massive failure of banks. The Banking Act of 1933 was signed into law by FDR as a temporary measure to insure bank deposits against loss if a bank failed. This law created a temporary organization called the Federal Deposit Insurance Corporation (FDIC). It became permanent in 1935. Since the first day of coverage on January 1, 1934, not one cent of a deposit has been lost due to bank failure. Likewise, in the first year, only NINE banks failed (no worries - customers had their money protected).

President Roosevelt signs the Bank Act of 1933
FDR signs bill

Over time, the amount of coverage by the FDIC has increased to $250,000 (most recently change in 2008). This means that an individual bank, who belongs to and pays the cost of the FDIC, can guarantee that each customer is protected in their money up to $250,000.

Intention: Purpose of the FDIC

The FDIC has many purposes. The primary one, as you might gather, is to protect deposits of customers made to banks, up to $250,000. There are many other purposes, too.

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