Federal Deposit Insurance Corporation
The Federal Deposit Insurance Corporation (FDIC) was created on June 16, 1933, under the authority of the Federal Reserve Act, section 12B (12 U.S.C.A. § 264(s)). It was signed into law by President FRANKLIN D. ROOSEVELT to promote and preserve public confidence in banks at the time of the most severe banking crisis in U.S. history. From the STOCK MARKET crash of 1929 to the beginning of Roosevelt's tenure as president in 1933, over 9,000 banks closed their doors, resulting in losses to depositors of $1.3 billion. The FDIC was established in order to provide insurance coverage for bank deposits, thereby maintaining financial stability throughout the United States.
The FDIC is an independent agency of the federal government. Its management was established by the Banking Act of 1933. It consists of a board of directors numbering three members, one the comptroller of the currency, and two appointed by the president with approval of the Senate. The two appointed members serve six-year terms, and one is elected by the members to serve as chair of the board. The headquarters of the FDIC is located in Washington, D.C., and the corporation has 13 regional offices. Most of its employees are bank examiners.
The FDIC does not operate on funds from Congress. The capital necessary to start the corporation back in 1933 was provided by the U.S. Treasury and the 12 Federal Reserve banks. Since then, its major sources of income have been assessments on deposits held by insured banks and interest on its portfolio of U.S. Treasury SECURITIES.
Besides administering the Bank Insurance Fund, the FDIC is also responsible for the Savings Association Insurance Fund (SAIF), which was established on August 9, 1989, under the authority of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) (12 U.S.C.A. § 1821 (2)). The SAIF insures deposits in savings and loan associations.
The FDIC also insures, up to the statutory limitation, deposits in national banks, state banks that are members of the Federal Reserve System, and state banks that apply for federal deposit insurance and meet certain qualifications. If an insured bank fails, the FDIC pays the claim of each depositor, up to $100,000 per account.
The FDIC may make loans to, or purchase assets from, insured depository institutions in order to facilitate mergers or consolidations, when such action for the protection of depositors will reduce risks or avert threatened loss to the agency. It will prevent the closing of an insured bank when it considers the operation of that institution essential to providing adequate banking.
The FDIC may, after notice and a hearing, terminate the insured status of a bank that continues to engage in unsafe banking practices. The FDIC will regulate the manner in which the depository institution gives the required notice of such a termination to depositors.
From 1980 to 1990, a total of 1,110 banks failed, principally owing to bad loans in a slowly weakening real estate market and risky loans to developing countries. The FDIC found itself in such financial straits that in 1990, Chairman L. William Seidman testified before Congress, "The insurance fund is under considerable stress" and is "at the lowest point at anytime in modern history."
The FIRREA and the FDIC Improvement Act of 1991 (codified in scattered sections of 12U.S.C.A.) came as reactions to the savings and loan crisis and to a banking crisis of the 1980s, which together cost the U.S. taxpayers hundreds of billions of dollars.
FIRREA gave the FDIC the authority to administer the SAIF, replacing the Federal Savings and Loan Insurance Corporation (FSLIC) as the insurer of deposits in savings and loan associations. The FDIC Improvement Act placed new restrictions on the way that the corporation repaid lost deposits. Before the law's enactment, the FDIC deemed it necessary to repay all deposits, whether or not they were at an insured bank or over $100,000, in order to protect public confidence in the nation's financial institutions. Since the law's enactment, it must take a "least-cost" method of case resolution. The act stipulates that the FDIC will not be permitted to cover uninsured depositors unless the president, the secretary of the treasury, and the FDIC jointly determine that not doing so would have serious adverse effects on the economic conditions of the nation or community.
The FDIC has worked with Congress on legislative proposals for deposit insurance reform. Although the FDIC has not proposed immediately raising the amount of insurance from $100,000 per account, it has recommended that the amount should be indexed for inflation using the Consumer Price Index every five years. The FDIC has proposed that such an indexing adjustment be made in 2005. In addition, it has recommended that the limit should not decline if the price level falls.
FDIC 2002 Annual Report. Available online at <www.fdic.gov> (accessed July 9, 2003).
Seidman, William L. 1993. Full Faith and Credit. New York: Random House.
White, Lawrence J. 1991. The S & L Debacle. New York: Oxford Univ. Press.
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