FEDERAL DEPOSIT INSURANCE
CORPORATION (FDIC)

The Federal Deposit Insurance Corporation (FDIC) is an independent U.S. government agency that, in an effort to maintain consumer confidence in the U.S. banking system, insures deposits up to $100,000 in most U.S. banks and savings and loan associations (S&Ls). Besides providing insurance on deposits the FDIC has many other responsibilities including regulating and examining banks and S&Ls and providing assistance to failing banking institutions. The FDIC is managed by a board of directors, which includes a chairman, a vice-chairman, and an appointive director. Other important FDIC officers include a comptroller of currency who supervises national and federally chartered banks and a director of the office of thrift supervision who is responsible for supervising federally chartered savings associations. Both officers are also board members. All of the five board members are appointed by the president and confirmed by the Senate. No more than three board members may belong to the same political party.

The FDIC was created in 1933 as part of the Glass-Steagall Act in an effort to restore faith in the U.S. banking system following events that led to the Great Depression. At the time of its creation, the FDIC insured only deposits in banks, not S&Ls. Deposits in S&Ls were, until 1989, insured by the Federal Savings and Loan Corporation. The FDIC was created amidst much controversy. Proponents of the new corporation felt it would prevent bank runs, facilitate a national check clearing system, and add much-needed safety and liquidity to bank deposits. Opponents of the FDIC feared it would overregulate banking operations, and that bank customers, knowing their deposits were fully insured, would favor high-interest-bearing accounts in high-risk banks rather than lower-interest accounts in more stable institutions. Initially, deposit insurance covered only the first $2,500. By 1934 it had quickly risen to $5,000 and by 1980 the cap was $100,000. In some cases the FDIC took the controversial position of ignoring the $100,000 limit. FDIC insurance covers deposits only. It does not cover securities, mutual funds, or other types of investments offered by FDIC-insured banks and S&Ls. Separate coverage, however, is generally provided for individual retirement accounts (IRAs) and Keogh plans.

When the FDIC is confronted with an imminent bank failure, three options are available and by law the least-costly option must be chosen. When a failed bank is closed by its chartering authority, the FDIC is named receiver and usually attempts to find a healthy institution to buy the failed entity. If for some reason this course of action is not feasible or cost-effective then the FDIC will "pay off the bank" by refunding depositors' losses up to $100,000. Depositors will usually receive their money within one or two business days. The third course of action is to stop the bank from failing with a bailout. If there is a bailout the FDIC has the option of invoking its controversial "too big to fail" doctrine. This option is a result of the Continental Illinois Bank fiasco in Chicago in 1984. The FDIC argued that the failure of a large and important financial institution, such as Continental, would seriously erode the foundations of the American banking system. Thus, in order to keep Continental solvent, all deposits, regardless of size, were covered. Many felt that this practice encouraged large investors to patronize larger financial institutions at the expense of smaller ones, however. Heeding these arguments, subsequent legislation made the "too big to fail" procedure more difficult to invoke by requiring the approval of the U.S. Department of the Treasury and the Federal Reserve.

As a result of the S&L bailout of the 1980s and the subsequent bankruptcy of the Federal Savings and Loan Insurance Corporation, responsibility for insuring S&L accounts was turned over to the FDIC. This was accomplished by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, which also created the Resolution Trust Corporation and the Savings Association Insurance Fund, and provided $150 billion in bailout funds from tax coffers.

Another result of the banking and S&L debacles of the 1980s was the FDIC Improvement Act of 1991 (FDICIA). The FDICIA was meant to ensure that the bank and S&L failures of the 1980s would not be repeated. Between 1983 and 1990 there were failures of approximately 1,150 commercial and savings banks. During this same period more than 900 S&Ls failed or were forced by the now defunct Federal Savings and Loan Insurance Corporation to merge with more-solvent institutions.

Amidst much opposition from the banking industry, the new legislation gave even greater regulatory powers to the FDIC concerning intervention, executive salaries, performance, and lending practices. The FDIC, in an effort to forestall a bank failure, may intervene in a bank's operations at an earlier date than before, force the bank to liquidate assets, and reduce dividends and staff in order to keep the institution solvent. The FDIC may also limit executive salaries, bonuses, and in troubled institutions, regulate realestate loans, and invoke regulatory guidelines on earnings. Observers are guardedly optimistic that the FDICIA is having a positive effect on the banking industry and is playing a role in the steady decrease of bank and S&L problems and failures. In 1996 there were five bank failures in the United States, down from 221 in 1988. There was a concurrent decrease in "problem" banks—82 in 1996, down from 1,500 in 1987.

The FDIC is independent of partisan political influence largely because its funding does not come from the government. The FDIC may assess banks and S&Ls for operating funds and for premiums on depositors' insurance. This assessment is based on a sliding scale keyed to each individual institution's risk factor, capital level, and a supervisory assessment. By the late 1990s, however, because most banks and S&Ls found themselves to be financially healthy, assessments are charged on only about 5 percent of these institutions. Funding for operations and depositors' insurance comes from FDIC investments in government securities. By law any assessment received by the FDIC from banks and S&Ls must be invested in U.S. government securities.

By the late 1990s the FDIC was insuring deposits worth nearly $2 trillion. Insurance funds for these deposits come from premiums paid by banks and savings associations and interest from these funds which, as required by law, are invested in U.S. government securities. Banks send their premiums to the Bank Insurance Fund while savings association premiums go to the Savings Association Insurance Fund.

In addition to insuring deposits and regulating banking practices, the FDIC helps finance mergers and acquisitions of failing institutions and regulates closings and reopenings. With the appropriate warnings and publicity the FDIC can also terminate an institutions deposit insurance. In relation to banks not part of the Federal Reserve System, the FDIC performs periodic audits and regulates mergers and acquisitions, locations of branch and main office facilities, changes of ownership, loans made to banks by other institutions, and bank security.