The meaning of an FDIC insured account is that if your bank fails and you have up to $250,000 in the account with the bank, your money won’t be lost with the bank, any losses you suffered will be reimbursed by the FDIC. For individuals who have more than $250,000 in a bank account, the money can be spread into multiple banks accounts that are insured by FDIC.
To know why and how FDIC works, how the loan system and modern savings work must also be understood. Modern bank savings accounts do not work like safe deposit boxes where your money is going in the vault to sit idly till you need it, instead, banks channel your money into investments by making it available for loans so they can generate revenue from the interest they put on the loan.
Only 10% of your deposits are required by banks to keep on hand, this means loans can be made with the rest 90%. For instance, if a bank deposit of $3,000 is made, a sum of $2,700 can be taken from that deposit by your bank and use to finance a loan such as a home mortgage or a car loan.
This banking type is known as “fractional reserve banking,” this is because the bank only keeps a fraction of your deposits as reserves. This creates additional liquidity in the capital markets. Although interest rates are kept low, this can create an unstable banking situation.
It is a possibility that a bank’s customers can request more than 10% of their money at any time simultaneously, in this kind of situation a “bank run” method is used, whereby some of the too many customers asking for their money are turned away empty-handed. This situation may also make other depositors ask for their money back because they might lose interest in the bank with the fear of not being able to recoup back their money.
This can trigger systemic bank fears by creating and spreading an effect that is contagion-like to other banks.
What is FDIC Insured Account
An FDIC insured account is a thrift or bank account that is fully covered by the Federal Deposit Insurance Corporation, an independent Federal government agency that works to safeguard deposits made by customers in case of bank failures. There is only $250,000 as the maximum amount a customer can be insured per a qualified bank account or FDIC insured bank account per a single ownership category.
FDIC Insured Account Tips
- A federally protected bank account deposit in an institution against bank failures or theft is known as an FDIC insured account.
- Member banks of the FDIC-backed deposit insurance agency pay regular premiums to fund claims in case of bank failure.
- A deposit can only be insured with the maximum amount of $250, 000 per bank.
Requirements for the FDIC Insured Account
In case any of the FDIC-insured banks can not meet the obligations of the depositors, this is where the FDIC comes to pay insurance to depositors on their accounts. The bank’s assets are sold and use it to pay off the debts owed, once declared failed and taken over by the FDIC.
Account-holders are refunded back their money to the tune of $250,000 when a bank fails. If the money is more than the insurable amount ($250,000), the depositor will have to wait till the FDIC are able to sell the bank assets to pay off the rest amount.
For your account to be qualified, you have to hold an account with a bank that participates in the FDIC program. It is required that participating banks display an official sign at points where deposits are always received so depositors can verify if the bank participates in the FDIC program by searching for them at fdic.gov.
Note: FDIC program participation is not a “must,” member banks are the ones that fund the insurance coverage through payments of premiums.
Generally, basic obligations of the bank, such as the demand deposit accounts, are covered by the FDIC. Some of the accounts that can be insured by the FDIC are savings account, certificates of deposits, checking accounts, negotiable order of withdrawal (NOW), money market account, and credit unions if they are a member of the National Credit Union Association (NCUA).
FDIC does not accept some types of accounts, such as investment accounts(that have bonds, stocks, e.t.c), safe deposit boxes, life insurance policies, and mutual funds. Up to $250,000 are used in insuring Individual Retirement Accounts (IRAs) and a revocable trust, however, revocable trust coverage extends to eligible beneficiaries.
FDIC Insured Accounts Examples
Up to $250,000 are guaranteed by the FDIC per person per account, but each co-owner will receive a full $250,000 of protection for joint accounts.
Together with numerous joint account benefits, joint account partners with a deposit of $500,000 will be fully protected.
Multiple accounts under the same account name in the same bank will be added together so as to determine the total deposit insured, so if a person has 2 accounts in the same bank and with the deposits totaling $400,000, it means that person will have $150,000 uninsured deposit.
But limits on deposits are different from bank to bank, even with the same owner. For instance, If Alecs Kay has a deposit of $180,000 in bank A and another $200,000 in bank B, he will be fully protected, although his total deposit under the same name exceeds $250, 000, since he is using different banks, he will be covered, as long as both banks are insured by the FDIC.
But if he made a transfer of $100,000 from bank B to bank A, he will have $30,000 uninsured deposit, because his total deposit in bank A will have become $280,000.
Savers profit from such insurance over deposit since they only need to worry about getting the best savings account interest rates rather than worrying about the safety of their money.
FDIC Insured Account Details
Created in 1993 as part of the Banking Act, FDIC works in guiding against bank failures to pay customers to deposit in case a bank fails or suspends its operation, after almost 10,000 US bank suspend their operations in a period of four years.
Since those banks do not have enough money to the withdrawal requests od depositors, this resulted in a bank run and the banks had to close down, leaving numerous depositors without getting their savings.
In order to guide against future bank panics, FDIC insured deposits up to $250,000 per individual account in a bank, and with the cover amount steadily growing since it was created.
The amount covered by the FDIC was increased from $100,000 to $250,000 in 2008 by Congress. Before 2008, Savings Association Insurance Fund (SAIF) and Bank Insurance Fund (BIF) were used by the FDIC to finance itself. These were basically funds generated from members’ banks by charging them insurance premiums for safekeeping their funds.
The President of the United States, George W. Bush, in 2005 signed the Federal Deposit Reform Act to combine the competing funds. All premiums, since then, are left in the Deposit Insurance Fund (DIF), from which all deposits insured by the FDIC are fully covered.
Unique Deliberation for the FDIC Insured Account
The reserve fund of the FDIC has not once been fully funded, as a matter of fact, the total insurance exposure of the FDIC is normally short by over 99%. The FDIC was granted power by Congress to borrow from the department of treasury, up to $500 billion, which makes the system to be fully backed by the federal reserve. This means the government will assist the FDIC if they exhaust their options, as per financial backing.
Money can also be borrowed from the treasury by the FDIC in the form of short-term loans. This occurred in 1991, during the savings and loan crisis when several billions of dollars were forced to be borrowed by the FDIC in order to cover the failing thrifts accounts.
FDIC Insured Account: Advantages And Disadvantages
Since it started its insurance on Jan. 1, 1934, the FDIC stated no single cent of insured funds has been lost by a depositor. Rating the FDIC on bank panic prevention, there has been a lot of success from the FDIC, as bank panics have not been suffered by the US economy in more than 80 years of FDIC operations.
Although not everybody loves the FDIC. Forced deposit insurance is believed, by detractors, to create a moral hazard in the banking system, and thought to bring about riskier behaviors in depositors and banks. They also argue that, if the FDIC is going to bail them out, then customers do not need to worry which of the banks will make a safer loan.