The Federal Deposit Insurance Corporation (FDIC) provides deposit protection for accounts opened at most banks in the United States. FDIC coverage protects account holders from losses associated with the bank which becomes insolvent. Covered accounts are checking, savings, certificates of deposit, and money market accounts. FDIC coverage does not extend to investment products such as mutual funds, stocks, or other securities that are sold by bank employees who hold investment licenses.
During the major economic recession of the 1930s, large numbers of banks filed bankruptcy due to borrowers defaulting on loans and depositors depleting their savings accounts. At that time there were no federal guarantees that protected account holders from loss, and consequently many people decided to close their accounts and withdraw their cash for fear of losing it. This only exacerbated the problem. To restore confidence in the industry, President Franklin D. Roosevelt signed into law The Banking Act of 1933. A key component of the act was the creation of the FDIC, which would insure depositors against future losses.
During the early years, FDIC coverage only extended to $2,500 US Dollars (USD) per account holder, per bank. Throughout the 20th century, the United States Congress routinely raised the level of FDIC coverage to reflect increases in the cost of living. By the 21st century, coverage had been increased to $100,000 USD per account holder. In response to another wave of bank failures in 2010, Congress voted to more than double FDIC coverage limits and raised the deposit protection level to $250,000 USD per account holder, per bank.
The FDIC coverage protects individual account holders, business entities, and people who are named as pay-on-death beneficiaries on insured bank accounts. An account holder can extend FDIC coverage by spreading deposits out across several banks so that no one banks holds more than $250,000 USD of deposits. In addition to covering standard bank accounts, the FDIC also separately insures funds held in Individual Retirement Accounts (IRA) for $250,000 USD, but this protection only applies to IRAs containing standard bank products and not securities.
When a bank becomes insolvent, the FDIC assumes control of its assets and attempts to sell the bank's assets to a financially sound institution. In many instances a new bank agrees to assume control of the deposit relationships, and no insurance claims are necessary. When the FDIC cannot find a buyer for a failed bank, it pays claims from depositors up to the maximum coverage level.