Recent FDIC changes and how they affect you

Posted in: Banking, Personal Finance
By William Pirraglia
Dec 24, 2008

What Is FDIC Insurance and How Does It Work?

The Federal Deposit Insurance Corporation (FDIC) has been insuring deposits in U.S. banks since 1933, as part of the Glass-Steagall Act. The large number of banks that failed during the Great Depression displayed the need for some reassurance for most Americans. The Federal government examined the Commonwealth of Massachusetts' Depositors Insurance Fund (DIF). They patterned the original insurance plan after this program.

The bank failures of 1933 were not the first instance of disaster and stimulus for a workable deposit insurance program. The lesser known "Panic of 1893" originally spurred support for a federally controlled U.S. banking system. First, the Federal Reserve System was created in 1913 to coordinate and oversee the welfare of all U.S. banking institutions. The government needed some way to improve the security of deposits in U.S. banks.

Little was done to establish a workable insurance program until the financial disaster of 1933, when more than 4,000 banks failed, as consumers sparked "runs" on thousands of financial institutions. FDIC provided – and still provides – that level of comfort and security that the U.S. needed then and now.
FDIC insures accounts for almost all U.S. banks.

The National Credit Union Share Insurance Fund (NCUSIF) provides identical insurance coverage for the nation's credit unions. Both programs are well funded, as all financial institutions make annual deposits to these entities and continually build up reserve balances.

In the event a bank fails, FDIC attempts to arrange a purchase of assets and liabilities by another strong financial institution. This approach often works well and depositors in the former institution merely continue to conduct business with the new bank. In most cases, other financially strong banks offer to purchase branches, deposits, and, at least, some of the loans of the soon to be extinct institution.

Should no buyer emerge, the FDIC insurance program activates. The FDIC manages the liquidation of the failed bank and covers the entire "principal" in open savings accounts. It is important to note that, should your bank owe you some amount of interest, which was not posted prior to the failure, FDIC does not insure this amount.

For example, if you have $5,250 in your account and $125 in interest due that has yet to be posted as of the failure date, the FDIC will hand you a check for $5,250, but not the accrued interest you've earned. However, your balance up to $100,000 (see below for recent temporary changes) in most accounts, and up to $250,000 in retirement accounts is safe.

New Changes in FDIC Insurance That Affect You

The wide-ranging new regulations implemented in 2008 to stabilize the U.S. banking and financial systems include some changes in FDIC insurance coverage that may affect you. Coverage has been improved to establish greater confidence in the financial institution community in the U.S.

Major change #1: All balances in "transaction accounts" (checking accounts) that do not earn interest, either personal or business, are insured in full, regardless of the balance. Those transaction accounts that are interest bearing are still covered under the standard – and new – regulations for bank accounts. Should you have one or more typical checking accounts that earn no interest, you are now insured for all funds, regardless of the size of your balance.

Major change #2: All interest-bearing accounts are now insured up to $250,000, instead of the usual $100,000. This increase is a major positive development, both from a psychological and financial perspective. It shows that the Federal government has a strong belief and commitment in the U.S. banking system, even in a period of economic crisis.

These changes are not permanent. They apply to all insured banking institutions until December 31, 2009. After that date, insurance limits will revert to their former levels. Your regular accounts will again be insured up to $100,000 and retirement accounts will be insured up to $250,000. The modifications enacted in 2008 were a result of the economic crisis that involved sub-prime mortgages and mortgage-backed securities issues.

Along with the benefits of higher insurance limits, the commitment of the Federal government and the FDIC should instill consumer confidence in the continuing stability of U.S. banks.

FDIC insurance has been an effective, positive influence on U.S. banks and consumer confidence since the Great Depression. The FDIC examines every insured bank on a regular basis and rates their operations and stability on a variety of strict criteria. These recent changes and improvements should help continue the confidence of both the consumer and financial communities.