Why is Deposit Insurance Important

Federal Deposit insurance serves an important role in the modern banking system. Known as the FDIC, this insuring company provides a plan that protects an individual depositor up to a certain dollar amount. This ensures the depositor, that if the bank they are doing business with fails; they will get back the money they deposited into their accounts, up to the insured amount. This money is provided from the FDIC insurance plan.

The real purpose of the FDIC insurance plan is to provide confidence in the financial system. The FDIC was created as a result of the banking panic during the Great Depression. Formed in 1933 with the Banking Act and signed into law by Franklin Roosevelt, the FDIC was created to give people the confidence to have their money deposited in the banks.

With the creation of the deposit insurance program, the FDIC also became a federal institution that helps to regulate the financial industry. Part of the FDIC mission statement details that they are to – examine and supervise financial institutions for safety and soundness and consumer protection. Like any other insurance company, the FDIC wishes to minimize losses, so by making sure that it’s participating members are following reasonable banking practices, it reduces the likelihood of having to pay a claim.

Another important role the FDIC takes on when a financial institution fails is to act as a receiver. This means that the assets of the failed institution are taken over by the FDIC. This allows the company to pay out all covered claims on insured deposits, to collect and organize the debts and assets of the failed organization, and to sell off or use and assets to pay off the debts, including the amounts of deposits in excess of the insurable amount. There is a procedure that the FDIC follows when determining who to pay back, and in what order. First the insured depositors are taken care of, which is taken care of promptly. After the liquidation of assets, the uninsured deposits are paid out. The next group to receive payment is the creditors of the institution. Finally, if funds still remain, the stockholders are compensated.

Please visit this website for more information on the Federal Deposit Insurance Corporation. The website provides several useful tools, including a search to find if a financial institution is insured, what types of deposits are covered and a calculator for you to determine just how much you have covered.