What Is an FDIC Insured Account?
An FDIC insured account is a bank or thrift account covered by the Federal Deposit Insurance Corporation (FDIC), an independent federal agency responsible for safeguarding customer deposits in the event of bank failures. The maximum insurable amount in a qualified account is $250,000 per depositor, per FDIC-insured bank, and per ownership category.
Key Takeaways
- An FDIC insured account is a bank account at an institution where deposits are federally protected against bank failure or theft.
- The FDIC is a federally backed deposit insurance agency where member banks pay regular premiums to fund claims.
- The maximum insurable amount is currently $250,000 per depositor, per bank.
How Fractional Reserve Banking Makes the FDIC Crucial
If you have up to $250,000 in a bank account and your bank fails, the FDIC reimburses any losses you endure. Modern bank accounts are not like safe deposit boxes; depositor money is pooled to make new loans to generate revenue from interest. Therefore, only 10% of deposits are typically reserved on hand by banks, enabling loan financing with the other 90% of deposits.
This process is called “fractional reserve banking.” It creates extra liquidity in capital markets and helps keep interest rates low but can create an unstable banking environment. In the event of too many simultaneous withdrawal requests, a bank could fall into a “bank run” situation, requiring the FDIC to step in to protect depositors.
Requirements for FDIC Insured Accounts
If an FDIC-insured bank cannot meet deposit obligations, the FDIC compensates depositors up to their insured limits and assumes control of the bank’s assets to pay off other debts. Participating banks are required to display an official sign indicating FDIC insurance, and account holders can verify a bank’s FDIC membership via FDIC.gov.
FDIC insurance covers several types of accounts, including NOW accounts, checking, savings, and money market deposit accounts, and certificates of deposit (CDs). However, it does not cover safe deposit boxes, investment accounts, mutual funds, and life insurance policies.
Examples of FDIC Insured Accounts
FDIC guarantees deposits up to $250,000 per account per person. For joint accounts, each co-owner receives the full $250,000 of protection. A couple or partners with a joint account with $500,000 on deposit would be fully protected. Separate from this are multiple accounts held in the same bank under the same name, which are added together for insurance purposes, potentially leaving some funds unprotected if they exceed $250,000.
Deposits in different banks are considered independently; hence $200,000 at Bank A and $150,000 at Bank B would be fully protected. However, transferring all funds into one bank beyond $250,000 could result in losing coverage on the excess amount.
The Legacy and Evolution of FDIC Insurance
Founded by the Banking Act of 1933 after a period of widespread bank failures, the FDIC restored American faith in banks post-Great Depression. The FDIC insures bank deposits based on member banks’ paid premiums, creating an insurance pool used to assure depositors.
The FDIC’s insurance coverage scope has increased over the years, from an initial $100,000 to $250,000 in 2008. Before 2006, the FDIC managed two funds for banks and savings associations, which were merged into the Deposit Insurance Fund (DIF).
Weighing the Benefits and Risks
The FDIC’s success can be gauged in that no depositor has lost insured funds since its inception. Critics, however, argue that insured deposits create moral hazard, promoting riskier behaviors amongst depositors and banks without due concern over bank safety.
Why FDIC-Backed Accounts Are Vital
One of the most significant benefits of FDIC insurance is peace of mind for depositors. Accounts are insured up to $250,000 per account category in the event of a bank failure.
Limits and Exclusions
Not all finances are protected by FDIC insurance which excludes stock, bond investments, mutual funds, life insurance policies, municipal securities, safe deposit boxes, and crypto assets.
Strategizing Your Banking Arrangements
While it can be safe to keep all your money in one bank, exceeding FDIC insurance limits per bank involves risk. Consider distributing excess funds across different financial institutions to ensure full insurance coverage.
A Final Thought on FDIC Insured Accounts
Though relatively rare, bank failures happen. From 2001 to 2022, 561 banks failed. Having an FDIC-insured account provides valuable financial security and peace of mind in safeguarding your deposits throughout any financial turbulence.
Related Terms: Federal Deposit Insurance Corporation, fractional reserve banking, joint accounts, investment accounts, banking failures, moral hazard
References
- Federal Deposit Insurance Corporation. “Deposit Insurance”.
- Federal Deposit Insurance Corporation. “Bank Find”.
- Federal Deposit Insurance Corporation. “The Importance of Deposit Insurance and Understanding Your Coverage”.
- Experian. “Is It Safe to Have All of Your Accounts at One Bank?”
