What is the FDIC and Will It Pay You?
The Federal Deposit Insurance Corporation (FDIC) was instituted in 1933 by the Glass-Steagall Act, which was meant to reform the banking system and eliminate speculation. The body was established as a temporary organization, run by the government. FDIC was authorized to supervise and regulate the non-member banks of states and to offer deposit insurance to banking institutions. The 1933 Banking Act allowed banks to open branches in all states, on condition that their activities were not in breach with state law.
FDIC is a government company, guaranteeing safety through deposit insurance in affiliate banks, currently numbering 8,195 institutions. The average amount per bank can reach up to 0 000 (savings, checking, and other accounts combined). The goal of the Federal Deposit Insurance Corporation is to encourage confidence in the financial system. Other functions of the corporation include supervision of financial institutions and management of bankrupt banks. In addition, there is a degree of consumer protectionism within its scope of responsibilities, especially when institutions comply with the Fair Credit Act, The Truth-In-Lending Act, and others. The effectiveness of the institution has proved absolute since no depositor has ever lost any insured funds from a failing bank for well over 70 years. The Federal Deposit Insurace Corporation is not funded by the Congress but rather by payments by banking and thrift institutions and by investing in US Treasuries securities. The management of The FDIC is appointed by the President; out of the five members of the Board of Directors no more than three can come from the same political party.
At the beginning of the current economic downfall, 25 US banking institutions became insolvent, which led to them being taken over by the FDIC. As a response, the corporation initiated a lending program, called Legacy Loans Program (LLP). Its major aim was to aid banking institutions in stripping off bad assets. In the summer of 2009, it was reported that 150 financial institutions were at the brink of filing for bankruptcy, since their non-performing loans added up to over five per cent of their total assets. The risk of diminishing the bank’s equity is a significant pointer for the FDIC and determines its future activity. In August 2009, the Spanish BBVA acquired the insolvent 2nd largest US bank in Texas. It was the first time when a foreign corporation took over a failing institution in the United States. The transaction cost the Fund a good Billion.
The rate of insolvency continued rising and at the end of the year, 140 banks had failed, which is the second worst statistic after the failure of 179 banks in 1992. As a result, the FDIC’s balance turned to the negative .2 billion and at the end of the fourth quartet – a negative .9 billion.
Disclaimer: This article is provided for educational and informational purposes only and should not be considered a substitute for professional and/or financial advice. The information found in this article is provided “AS IS”, and all warranties, express or implied, are disclaimed by the author.
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