The American banking industry has come a long way since the Great Depression.
At the dawn of the 20th century, bank failures were commonplace, particularly among rural, single-branch institutions.
The situation became untenable in the early 1930s when the American banking industry teetered on the verge of collapse and the country’s economy sputtered to a shaking halt. Out of this dark tableau rose one of the Great Depression’s most enduring legacies: the Federal Deposit Insurance Corporation, which insures deposits held with thousands of U.S.-chartered banks.
If you have a deposit account with a bank based in the United States, you very likely benefit from FDIC deposit insurance. In the following sections, we’ll take a closer look at deposit insurance in the United States and the nuts and bolts of FDIC coverage.
What Is FDIC Insurance?
Let’s examine what the FDIC’s deposit insurance covers, how that coverage works, and steps depositors can take to maximize their coverage.
What FDIC Insurance Covers
FDIC insurance provides dollar-for-dollar coverage on qualifying deposits at FDIC member banks, for up to at least $250,000. When an FDIC member bank fails (defaults) or experiences terminal financial troubles, the FDIC compensates depositors for the full value of principal balances held in insured accounts, plus any interest owed through the default date.
FDIC member banks are clearly identifiable by the FDIC seals displayed on branch entrances, counters, and website homepages. If you are not sure whether a bank is an FDIC member, use the FDIC’s BankFind tool to confirm.
The FDIC insures all qualifying deposits held at member institutions, regardless of the account holder’s identity. Business accounts held in the name of a corporate entity are insured just like personal accounts. Account holders need not be U.S. citizens or permanent residents to qualify for FDIC insurance.
Per the FDIC’s deposit insurance brochure, the account types — what the FDIC calls “account ownership categories” — to which FDIC insurance applies include, but are not limited to:
- Checking accounts
- Savings accounts
- Money market accounts
- Certificates of deposit and other time deposit accounts
- Negotiable Order of Withdrawal (NOW) accounts, which are deposit accounts popular with branchless financial services firms
- Bank-issued negotiable instruments, such as cashier’s checks and money orders
What FDIC Insurance Doesn’t Cover
FDIC insurance does not cover certain common ownership categories (account types) and financial instruments, including some instruments that can be readily redeemed for cash. A non-exhaustive list of excluded ownership categories and deposit products includes:
- Exchange-traded securities, including stocks and ETFs
- Mutual funds
- U.S. Treasury notes, bills, and bonds (although the U.S. government separately guarantees these instruments)
- Municipal bonds
- Corporate bonds
- Life insurance policies
- Contents of safe deposit boxes held at member institutions
Coverage Limits Over Time
Congress has increased the FDIC’s minimum deposit insurance limits eight times since the corporation’s inception. Although intermittent, the overall rate of increase has outpaced inflation:
- 1934: $2,500
- 1935: $5,000
- 1950: $10,000
- 1966: $15,000
- 1969: $20,000
- 1974: $40,000
- 1980: $100,000
- 2008: $250,000
Between commercial banks and savings institutions, FDIC-insured financial institutions have some $17.16 trillion on deposit as of June 2021. However, FDIC insurance does not cover all funds on deposit with FDIC-insured banks.
How FDIC Insurance Works
When a bank fails, the FDIC serves as its cleanup crew. Since the FDIC does not issue bank charters, it does not have the legal authority to close banks on its own. Rather, the FDIC serves as the receiver for banks whose charters have been revoked by chartering authorities, usually state bank regulators or the federal Office of the Comptroller of the Currency.
Finding a New Bank
As the receiver, the FDIC assumes temporary ownership of the failed bank’s assets. The ownership transition is invariably hasty, often occurring over the weekend.
In most cases, the FDIC can find another FDIC member bank willing to assume the failed institution’s deposits and other viable assets. Ideally, depositors’ accounts are simply transferred to the new bank with no change in balance or active status. In such cases, depositors can deposit and withdraw funds without interruption.
Compensating Depositors for Closed Account Balances
When the FDIC is unable to find a member bank willing to assume the failed bank’s deposits, the agency may instead elect to issue checks to affected depositors for their full account balances, plus any interest due, up to the insured limit. In this relatively rare instance, depositors may lose access to their funds for a few business days.
Compensating Depositors Above the Insurance Limit
Depositors with balances above the minimum insurance limit may recover some portion of excess deposits. However, the process is invariably more drawn out than that for compensating depositors below the minimum insurance limit, and the outcome is not guaranteed.
Depositors generally receive compensation for excess deposits on a rolling basis as the FDIC liquidates the failed bank’s remaining assets. In most cases, payment for excess deposits is pro rata, meaning the depositor only receives a portion of the original balance.
For instance, a depositor with $300,000 in the failed bank would receive $250,000 from the FDIC, but may only get 50 cents on the dollar for their remaining $50,000 above the insurance limit. Depending on the complexity of the liquidation process, depositors may have to wait several years for the FDIC to fulfill their remaining claims on excess deposits held with failed banks.
Maximizing Your FDIC Insurance Coverage
Depositors may avoid this process-and minimize the risk of principal loss-by heeding the FDIC’s minimum insurance coverage limits:
The FDIC treats as cumulative all balances in individual (single) accounts held by the same depositor at the same insured bank.
For instance, if you carry a cumulative balance of $200,000 in individual checking, savings, and money market accounts at Bank A, your entire balance is covered by FDIC insurance. If your cumulative balance rises to $300,000 in those three accounts, you’ll have an uninsured balance of $50,000, even if no single account’s balance tops $250,000.
The FDIC insures balances held in joint accounts separately from balances held in single accounts, even when the joint account holders also hold single accounts with the same institution. Joint account balances are divided equally and insured up to $250,000 per account holder.
Thus, a couple can deposit up to $500,000 in their joint account without exceeding the FDIC limit.
The FDIC does not distinguish between sole proprietorships (single-person business entities) and their owners, even when the sole proprietorship’s name is distinct from the owner.
When you have a business bank account with the same institution at which you hold personal funds, the FDIC treats your business and personal deposits cumulatively. However, multi-member business entities may be considered separately from their owners.
The FDIC considers funds held in most common retirement account types (including traditional and Roth IRAs) to be separate from funds held in non-retirement deposit accounts, even when the accounts are held in the same name.
Provided certain conditions are met, the FDIC insures revocable trust account balances up to $250,000 per unique beneficiary.
For instance, the balance held in a trust account with two unique beneficiaries is insured up to $500,000, the balance held in a trust account with four unique beneficiaries is insured up to $1 million, and so on.
FDIC insurance is only the best-known type of government-backed deposit or balance insurance available to U.S. consumers. If you invest in market-traded equities through an online brokerage, you likely benefit from at least one other: SIPC insurance, backed by the Securities Investor Protection Corporation. Although more limited than FDIC insurance, SIPC provides some protection for assets held in securities accounts with member-SIPC institutions.
Meanwhile, if you bank with a credit union, you have access to NCUA insurance coverage through the National Credit Union Administration. NCUA insurance is analogous to FDIC insurance, just for credit unions.
And if you bank with an institution chartered in Massachusetts, your balances may be covered by Depositors Insurance Fund (DIF) insurance. DIF insurance fully insures account balances up to $500,000 at member institutions, doubling the FDIC’s protection.