We hear the term “bank run” every now and then. Most recently it was early this year when a couple of major banks failed. Bank runs happen when too many people try to pull their money out of their bank at the same time – this is something that can happen when you use fractional reserve banking like we do here in the US – and it causes the bank to collapse. The good news is that it doesn’t happen often! But, since it’s such a big deal when it does, let’s take a look at what protects us.
Enter: the Federal Deposit Insurance Corporation (FDIC)!!!!
Here are Five Fast Facts about the FDIC:
- 🤔 What Is It? - The mission of the Federal Deposit Insurance Corporation (FDIC) is to maintain stability and confidence in America’s financial system by ensuring banks don’t fail. It was set up by Congress, but banks pay premiums to get FDIC protection. It’s like an insurance agency for banks.
- 🔍 Secondary Purpose - It also provides some oversight over banks’ practices to make sure they are operating soundly, and it's the main regulator for banks that aren’t part of the Fed system. So many rules in banking…
- 👍 The History - The FDIC was created in 1933 after thousands of banks failed due to the stock market crash. Since then, no one has lost any insured funds due to a bank failure. Let’s hope that perfect record keeps going for a VERY long time!
- 💰 The Coverage - A bank that is “FDIC insured” offers guarantees for up to $250k for each depositor based on account type. This means if the bank fails you’ll get all your money back up to that amount. Consumers don’t need to do anything or pay extra, it’s automatic if your bank is with the FDIC. Booyah!
- 🧾 The Nuance - The protection covers depositors and account types. For example, if you have a checking account, a savings account, and a CD totaling $250k at one bank, you’re completely protected against that bank failing (if the total is $300k, then you could lose $50k). If you want to put away more than that, you can open a new account at a different bank, which would also then be covered up to $250k. Or, you could have multiple joint accounts with a spouse, to get an additional $250k of coverage. Where there’s a will, there’s a way!
🔥Bottom line: If you have more than $250k that you want in a bank, it’s probably best to talk to a financial advisor to make sure you’re protected. The bottom line is that the FDIC is a key part of our economic structure that helps citizens have confidence that their money is safe. That, in turn, helps reduce the likelihood of bank runs which can kill a bank very quickly.
Did you know about the FDIC and its purpose? (Before reading this article😉)
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