Federal Deposit Insurance Corporation

The Federal Deposit Insurance Corporation (FDIC) is the agency that insures bank deposits and supervises banks to prevent failures. Created in 1933 in response to the Depression, the FDIC guarantees that if a bank fails, depositors will be paid in full up to $250,000 per account. It also acts as the receiver — the liquidator — when a bank becomes insolvent.

What the FDIC insures and what it doesn’t

The FDIC insures deposits at member banks. A deposit is money held in a checking, savings, or money market account. The coverage limit is $250,000 per account per bank — if you have $300,000 in a checking account and the bank fails, the FDIC pays you $250,000 and you lose $50,000. The limit applies separately by ownership type: you can have $250,000 in a personal account, another $250,000 in a joint account with your spouse, another $250,000 in a trust, and so on, all at the same bank.

Critically, the FDIC does not insure securities. If you buy a stock or bond through your bank, it is not covered. The Securities Investor Protection Corporation covers that. If you deposit money in a brokerage account held by the bank, the bank’s failure does not put your securities at risk — they belong to you and would be transferred to another broker — but the cash in the account is only SIPC-covered to $250,000.

How bank failures work

When a bank’s assets fall below its liabilities, it is insolvent. The state banking regulator and the FDIC watch for this. If a bank is in trouble, the FDIC and regulators offer it a chance to merge with a healthier bank (a “assisted transaction”) or to raise capital. If neither works, the bank is closed. The FDIC becomes the receiver.

As receiver, the FDIC assumes control of the bank’s assets, verifies claims from depositors and creditors, and sells the assets. Depositors are paid first up to the $250,000 limit. Other creditors — bank-issued bonds, loans from other banks, suppliers — are paid from what remains, usually for cents on the dollar. Uninsured depositors often lose money.

The Deposit Insurance Fund

Member banks pay premiums into the Deposit Insurance Fund. The premium is set annually by the FDIC based on the size of the bank’s deposits and its risk profile — riskier banks pay more. The Fund is supposed to be large enough to cover failures. In the 2008 financial crisis, the Fund nearly ran out after a series of large bank failures. The FDIC then raised premiums, and banks repaid special assessments. Today the Fund is well-capitalized.

The FDIC as supervisor

The FDIC does not just pay insurance claims; it also supervises banks — a role that brings it into the regulatory structure alongside the OCC (for national banks) and state regulators (for state-chartered banks). The FDIC examines state-chartered, non-member banks. For state-chartered, Fed-member banks, supervision is shared between the FDIC and the Federal Reserve. This overlap creates a complex supervisory structure in which a single bank may be examined by multiple regulators.

Moral hazard and the deposit insurance debate

Deposit insurance was created to prevent bank runs — panics in which depositors rush to withdraw money, triggering a cascade of failures. By guaranteeing deposits, the FDIC has largely eliminated this risk. But it creates a problem: if deposits are guaranteed, depositors have no incentive to check whether their bank is taking reckless risks. Why move your money if the government guarantees it either way? This is called “moral hazard” — the insured party is shielded from consequences and therefore takes more risk.

Banks respond to this by taking leverage — borrowing aggressively and investing in riskier assets because they know deposits are insured. Regulators try to offset this by setting capital standards and examining banks for risk-taking. But the tension is fundamental. Some economists argue that deposit insurance creates more stability (fewer bank runs) while others argue it enables riskier behavior (more bank failures per episode).

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