So you know that the Federal Deposit Insurance Corporation (FDIC) protects your money in deposit accounts at FDIC insured institutions up to $250,000, but have you ever wondered how they pay for it?
The FDIC was created in 1933 after thousands of banks failed in the 1920s and early 1930s and has been protecting depositor’s funds since the beginning of 1934. They are an independent agency of the federal government but they get absolutely no funding from Congress. So where do they come up with the money? They get it in one of two ways:
- 1. Banks and thrifts institutions pay premiums for the FDIC’s insurance coverage.
- 2. The FDIC invests those premiums in U. S. Treasury securities.
In late May of this year, the FDIC charged an emergency fee (5 cents on $100 of assets, minus certain types of capital) on banks and thrifts to help replenish that fund. It was the first time the special assessment was used since 1996! More details on the assessment can be found at the NYT’s DealBook blog.
However, in reality, you’re really paying for that coverage. Much like how home sellers include the list price of real estate agent commissions into the sale price of a home, banks incorporate these special fees and insurance premiums into the interest rates they’re willing to offer on their deposit accounts. With the FDIC threatening to levy additional emergency fees in the third and fourth quarter, it’s likely that rates are going to continue to remain low.
Fortunately, the FDIC is backed by the full faith and credit of the United States government… so even if they run out of cash, we can just print some more!
Jim writes about personal finance at Bargaineering.com.