Federal Deposit Insurance Corporation (FDIC) – Definition

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Federal Deposit Insurance Corporation (FDIC) Definition

The Federal Deposit Insurance Corporation (FDIC) is an autonomous federally-controlled agency that backs deposits in the banks in case of bank failures. It was formed in 1993 to restore public confidence and to promote the financial system’s growth through implementing effective banking practices. Up till now, the agency insures the deposits of more than $25,000 per depositor account (if the depositor’s institution is a member firm). Consumers must ensure that FDIC insures their institution.

A Little More on What is the Federal Deposit Insurance Corporation (FDIC)

The FDIC was formed to avoid the uncertainty and resultant run on the banks that resulted during the great depression. During this period, many customers, afraid about the bank closures and uncertainty, rushed to withdraw their money. Because of sudden fear and large number of customers, many banks were unable to cater to the rush of withdrawal requests. Customers who withdrew first recovered their assets, while those who waited lost their money. The FDIC avoids this situation by ensuring a deposits’ safety, irrespective of the bank’s condition.

The FDIC covers 100% of checking, savings, and money market accounts, as well as CDs (certificates of deposit). Coverage for trusts and IRAs (Individual retirement accounts) is limited. The FDIC does not cover mutual funds, life insurance, annuities, bonds and stocks, or safe-box deposit contents. Cashiers checks and money orders issued by the closed/failed bank will be covered.

Note: The FDIC does not insure banks against theft, fraud or the like.

References For the Federal Deposit Insurance Corporation

Academic Research on Federal Deposit Insurance Corporation (FDIC) Definition

Federal deposit insurance, regulatory policy, and optimal bank capital, Buser, S. A., Chen, A. H., & Kane, E. J. (1981). The journal of Finance36(1), 51-60. This paper seeks to explain the combination of explicit and implicit pricing for deposit insurance employed by the FDIC. Essentially, the FDIC sells two products—insurance and regulation. To span the product space, it must and does set two prices. The paper argues that the need to establish regulatory disincentives to bank risk‐taking is the heart of the controversy over the adequacy of bank capital and that the ability to close risky banks before exhausting their charter value stands at the center of these disincentives and in front of the FDIC’s insurance reserves.

The valuation of FDIC deposit insurance using option-pricing estimates, Marcus, A. J., & Shaked, I. (1984). Journal of Money, Credit and Banking16(4), 446-460.

Risk and regulation in banking: Some proposals for federal deposit insurance reform, Scott, K. E., & Mayer, T. (1970). Stan. L. Rev.23, 857.

The Intellectual History of the Federal Deposit Insurance Corporation Improvement Act of 1991, Benston, G. J., & Kaufman, G. G. (1994). In Reforming financial institutions and markets in the United States (pp. 1-17). Springer, Dordrecht. This paper explores the Federal Deposit Insurance Corporation Improvement Act (FDICIA) passed by the Congress in November 1991. It examines the coverage and the complexity of the enacted act. For clarity, the paper divides the act into five parts and analyses how this act affects banking, and its intended working process.

Thrift deregulation and federal deposit insurance, Barth, J. R. (1989). Journal of Financial Services Research2(3), 231-259. This paper analyses the effects of the Congress’s decision to use strict enforcement and regulation to reduce the probability of failure inn federal insurance funds. This paper explores a protracted debate centering on the cost of resolving troubled thrifts and whether healthy thrifts can pay these costs.

The origins of federal deposit insurance, Calomiris, C. W., & White, E. N. (1994). In The regulated economy: A historical approach to political economy (pp. 145-188). University of Chicago Press. The purpose of this paper is to explain how and why federal deposit insurance-special-interest legislation that had failed in Congress for nearly fifty year-was adopted with near unanimity in 1933.

The reform of federal deposit insurance, White, L. J. (1989). Journal of Economic Perspectives3(4), 11-29. This article will review the current system of deposit insurance provided by the Federal Deposit Insurance Corporation (FDIC) and advocate a set of necessary reforms to combat poor financial condition.

Deposit insurance reform in the FDIC Improvement Act: The experience to date, Benston, G. J., & Kaufman, G. G. (1998). Economic Perspectives-Federal Reserve Bank of Chicago22, 2-20. This paper examines the effect of the Federal Deposit Insurance Corporation Improvement Act of 1991 on deposit insurance, and banks penalty on financially shaky institutions.

The use of market information in pricing deposit insurance, Thomson, J. B. (1987). Journal of Money, Credit and Banking19(4), 528-537.

 

The effect of the Federal Deposit Insurance Corporation Improvement Act of 1991 on bank stocks, Liang, Y., Mohanty, S., & Song, F. (1996). Journal of Financial Research19(2), 229-242. In this study, the authors use a multivariate regression model to investigate the effect of the passage of the Federal Deposit Insurance Corporation Improvement Act (FDICIA) of 1991 on returns to the shareholders of bank‐holding companies. The empirical results suggest that the shareholders of well‐capitalized banks benefited from the enactment of the FDICIA, while those of undercapitalized banks experienced significant losses during the announcement period. It also shows how the FDICIA affected stocks.

The federal deposit insurance fund that didn’t put a bite on US taxpayers, Kane, E. J., & Hendershott, R. (1996). Journal of Banking & Finance20(8), 1305-1327. This paper analyzes how differences in incentive structure constrain the attractiveness of interest-rate speculation and other risk-taking opportunities to managers and regulators of credit unions, following the survival of the National Credit Union Share Insurance Fund (NCUSIF) in the 1980s, unlike the Federal Savings and Loan Insurance Corporation and the Bank Insurance Fund which fell into a state of accounting insolvency.

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