Wednesday, July 16, 2008

All Hail the FDIC!

It's old news by now - IndyMac, a major mortgage lender has failed. Industry insiders believe that before all the economic mess is over, many more banks will follow in IndyMac's footsteps and go belly-up. Amazingly, most people who have money in these failed banks will lose exactly: NOTHING. This is all thanks to a very smart invention of the U.S. government: the FDIC. I know, it pains and amazes me to admit it, but sometimes government can... hrrr... do acceptable work...

So who is the FDIC? Here is how that agency introduces itself:
"The Federal Deposit Insurance Corporation (FDIC) preserves and promotes public confidence in the U.S. financial system by insuring deposits in banks and thrift institutions for at least $100,000; by identifying, monitoring and addressing risks to the deposit insurance funds; and by limiting the effect on the economy and the financial system when a bank or thrift institution fails.

An independent agency of the federal government, the FDIC was created in 1933 in response to the thousands of bank failures that occurred in the 1920s and early 1930s. Since the start of FDIC insurance on January 1, 1934, no depositor has lost a single cent of insured funds as a result of a failure.

The FDIC receives no Congressional appropriations – it is funded by premiums that banks and thrift institutions pay for deposit insurance coverage and from earnings on investments in U.S. Treasury securities. With an insurance fund totaling more than $49 billion, the FDIC insures more than $3 trillion of deposits in U.S. banks and thrifts – deposits in virtually every bank and thrift in the country.

Savings, checking and other deposit accounts, when combined, are generally insured to $100,000 per depositor in each bank or thrift the FDIC insures. Deposits held in different categories of ownership – such as single or joint accounts – may be separately insured. Also, the FDIC generally provides separate coverage for retirement accounts, such as individual retirement accounts (IRAs) and Keoghs, insured up to $250,000. The FDIC's Electronic Deposit Insurance Estimator can help you determine if you have adequate deposit insurance for your accounts.

The FDIC insures deposits only. It does not insure securities, mutual funds or similar types of investments that banks and thrift institutions may offer. (Insured and Uninsured Investments distinguishes between what is and is not protected by FDIC insurance.)"
This is an excellent institution that adds stability and security into the financial system. Can you imagine a situation where if your bank failed you would lose your life savings? Luckily you probably don't have to.

Nevertheless, FDIC has some very clear limits. Most accounts are insured only up to $100,000. This doesn't automatically mean that you would lose every dime above $100K if your bank failed, but it does mean that you would probably not get it all back. This has some important implications for me. I have been very cognizant of these limits and have made sure that our FDIC insurable funds never exceed $100,000 per institution.

Incidentally, note that the FDIC insures bank deposits, not other forms of investment. If you have a brokerage account you may also want to read about another entity that may be insuring you assets against brokerage firm failure (not investment losses), the SiPC.

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