Federal Deposit Insurance Corporation (FDIC) history
An agency created by Congress to provide insurance against customer deposits at banks and other banking institutions. The concept of deposit insurance was introduced during the banking crisis of 1932 as a means of attracting customers back to banks, from which they had been withdrawing their money. The “money hoard” exemplified the loss of confidence by the public in the banking system and also was reducing credit creation by banks at a particularly vulnerable time during the Great Depression. Although the concept was not universally popular, it was seen as a measure that could help restore confidence in the banking system.
There had been more than a dozen experiments with deposit insurance within the states prior to the creation of the FDIC, several of which were mandatory and the rest voluntary. Federal deposit insurance was provided by the BANKING ACT OF 1933. The law created the FDIC, a private government-sponsored agency that provided insurance for deposits at member banks for a maximum of $2,500 per account. The amount was raised to $5,000 a year later, $10,000 in the 1950s, and $20,000 in 1969. All banks that were members of the FEDERAL RESERVE were required to join, and state banks had the option to join. Premiums were charged to member banks, and these funds provided the money needed to insure deposits at failed banks. A similar fund called the Federal Savings & Loan Insurance Corp. (FSLIC) was created in 1934 to provide similar insurance to savings institutions not technically classified as commercial banks.
Insurance was increased to $100,000 per account by the DEPOSITORY INSTITUTIONS DEREGULATION AND MONETARY CONTROL ACT (DIDMCA) in 1980. In the late 1980s, a banking crisis forced a reform of the FDIC, and the Federal Deposit Insurance Corporation Improvement Act (FDICIA) was passed in 1991. The act provided more stringent requirements concerning bank capital, calculated the insurance premium on the banks’ risk activities, and gave the FDIC the right to borrow from the U.S. Treasury to cover bank failures in the event that the Bank Insurance Fund became depleted. Today, the Bank Insurance Fund, the actual fund itself, technically covers the bailout of a failed member.
The thrift crisis of the 1980s also caused the failure of the FSLIC, which was dissolved in 1989 by the FINANCIAL INSTITUTIONS REFORM, RECOVERY AND ENFORCEMENT ACT (FIRREA). The thrifts’ fund became the Savings Association Insurance Fund, administered along with the bank fund by the FDIC. It too charges premiums to its members so that it can provide assistance to failing thrift institutions if required.
The amount of premiums charged to participating banks in deposit insurance funds has always been contentious, with many larger banks claiming that they were being penalized for the mismanagement of smaller banks that required assistance. In the largest bailout ever provided by the FDIC, that of the Continental Illinois Bank in 1984, the amount of insured deposits at the bank was greater than the fund’s ability to guarantee all deposits, so a special bailout arrangement with other large banks had to be arranged to provide cash to depositors if requested.
- Barth, James, and R. Dan Brumbaugh. The Reform of Federal Deposit Insurance: Disciplining the Government and Protecting Taxpayers. New York: Harper- Business, 1992.
- Kennedy, Susan Estabrook. The Banking Crisis of 1933. Lexington: University Press of Kentucky, 1973.