Federal Deposit Insurance Corporation

Definition

The Federal Deposit Insurance Corporation (FDIC) is a United States government agency created in 1933 to provide deposit insurance to depositors in U.S. commercial banks and savings institutions. It was established during the Great Depression to restore public confidence in the banking system by protecting depositors' funds, ensuring that even if a bank failed, customers would not lose their savings. This security helped stabilize the banking sector and fostered an environment conducive to economic recovery.

5 Must Know Facts For Your Next Test

1. The FDIC insures deposits up to $250,000 per depositor, per insured bank, for each account ownership category.
2. The establishment of the FDIC was a direct response to the thousands of bank failures that occurred in the 1920s and early 1930s.
3. The FDIC is funded by premiums paid by member banks, not taxpayers, making it a self-sustaining entity.
4. In addition to protecting depositors, the FDIC also promotes sound banking practices and conducts regular examinations of insured banks.
5. The FDIC has resolved over 500 bank failures since its inception, ensuring that insured depositors had access to their funds even when banks collapsed.

Review Questions

• How did the creation of the Federal Deposit Insurance Corporation influence public trust in the banking system during the Great Depression?
  • The creation of the FDIC significantly influenced public trust in the banking system by providing a safety net for depositors. During the Great Depression, many banks failed, leading to widespread fear and skepticism about the security of personal savings. The FDIC assured customers that their deposits were protected up to $250,000, which encouraged people to deposit money back into banks and helped stabilize the financial system.
• What role did the Glass-Steagall Act play in the establishment of the Federal Deposit Insurance Corporation and its functions?
  • The Glass-Steagall Act played a crucial role in establishing the FDIC by creating a framework for protecting depositors and regulating banking practices. Enacted in 1933, it separated commercial banking from investment banking activities, reducing risks associated with speculative investments. This legislation allowed the FDIC to focus on insuring deposits and maintaining stability within commercial banks, fostering a more secure financial environment.
• Evaluate the long-term impact of the FDIC on the American banking system and economic stability since its inception.
  • Since its inception, the FDIC has had a profound long-term impact on the American banking system and overall economic stability. By insuring deposits and preventing bank runs, it has significantly reduced the frequency and severity of bank failures. This has led to increased public confidence in banks, encouraging saving and investing which in turn supports economic growth. Additionally, the FDIC’s role in promoting sound banking practices has helped create a more resilient financial system that can better withstand economic shocks.

Related terms

Bank Run: A situation where a large number of customers withdraw their deposits simultaneously due to concerns about a bank's solvency.

Glass-Steagall Act:

A law enacted in 1933 that established the FDIC and separated commercial banking from investment banking.

Deposit Insurance: A safeguard that protects bank depositors by covering their deposits up to a certain limit in the event of a bank failure.