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What is the FDIC, and how does it work?

·4 min read

No doubt you’ve seen an "FDIC-insured" or "Member FDIC" sign on the wall of a bank or at the bottom of a bank website homepage. Almost all banks, including online banks, are insured by the Federal Deposit Insurance Corporation (FDIC).

The FDIC is an independent government agency that insures money people deposit at a bank. If the bank fails, the FDIC repays up to $250,000 per person per account type at each FDIC-insured bank.

The FDIC was created in 1933 in response to the turmoil of the 1929 stock market crash. Following the crash, people rushed to withdraw their money from banks. As a result of these bank runs, as many as 9,000 banks failed and $7 billion dollars in deposits were lost, wiping out the life savings of millions of Americans.

President Franklin D. Roosevelt signed the Banking Act of 1933, establishing the FDIC to restore trust in the US banking system. The FDIC reports that since then, no one has lost any FDIC-insured money due to a bank failure.

How does the FDIC work?

While the FDIC’s primary role is to insure deposits at US banks, the agency has several other duties. Those duties include supervising banks’ compliance with consumer protection laws and taking charge of bank assets and debts after a failure.

The FDIC isn’t funded by money approved through Congress. Instead, it’s funded like most insurance companies — through premiums. Banks and other savings institutions pay premiums to the FDIC in exchange for insuring the money they hold. Those premiums allow the FDIC to repay customers if a bank fails.

Simply opening an eligible account in an FDIC member bank is enough to insure your deposit money. And while nearly all banks are FDIC-insured, you can use the FDIC’s BankFind to be certain.

The FDIC, however, does not insure deposits at credit unions. Those accounts are usually insured by the National Credit Union Administration (NCUA), which operates similarly.

What does the FDIC insure?

The FDIC insures deposits, including interest, that consumers make into certain types of accounts, including:

  • Checking accounts

  • Savings accounts

  • Money market deposit accounts

  • Certificates of deposit (CDs)

  • Cashier’s checks, money orders, and other official items ordered by a bank

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The FDIC does not insure stocks, bonds, mutual funds, life insurance policies, annuities, or the content of safety deposit boxes.

The FDIC insures up to $250,000 per person, per account ownership category. Ownership categories include:

  • Single/individual accounts

  • Joint accounts

  • Certain retirement accounts, including IRAs and self-directed 401(k)s

  • Employee benefit plans at insured institutions

  • Revocable and irrevocable trusts

The $250,000 cap applies to the same type of ownership account at the same bank. So, for example, the money you keep in individual savings, checking, and CD accounts at the same bank all count toward that $250,000 limit. If you have $270,000 between those three accounts, $20,000 of it would not be insured.

What if I have more than the $250,000 limit?

There are ways to make sure all your deposit money is insured. You can open up accounts at multiple banks and take advantage of the FDIC’s policy of treating each bank separately. Or you can spread your money across different ownership account types. For example, money you keep in a joint account is considered separate from an individual account. Each joint account owner is insured for up to $250,000. So you could have $250,000 in an individual savings account and $500,000 in a joint savings account at the same bank and still have all your money covered by FDIC insurance.

You can use the FDIC’s Electronic Deposit Insurance Estimator to see how different banking scenarios impact your insured money.

What happens if your bank fails

When a bank fails, the FDIC jumps into action to move the insured deposits from the failed bank to a new account at a healthy FDIC-insured bank. This process happens automatically and doesn't require filling out a claim. Any electronic deposits you had set up should also automatically redirect to this new account, although you’re not obligated to keep your money in the account. Access to your insured deposits should happen quickly — the FDIC tries to make deposits available to people within two days. If another bank doesn’t take over the failed bank, you will receive a check with your deposit money.

Bank failures are relatively rare, but they do happen. Between 2001 and 2022, 561 banks failed, according to the FDIC. That may sound high, but of those failures, 389 happened between 2009 and 2011 in the wake of the financial crisis. Still, there is no downside to ensuring that the FDIC covers all of your deposit money.