The Role of The Federal Deposit Insurance Corporation

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It’s common to see financial institutions label themselves “FDIC insured,” without thinking about what that term means or the government body behind it. The Federal Deposit Insurance Corporation has a history and role that goes beyond securing banks’ assets. It is worthwhile for financial professionals to consider the purpose and function of the FDIC more closely. A detailed examination of such groups and regulatory bodies is one of the learning opportunities within graduate degrees such as a Master of Science in Finance.

What is the history of the FDIC?

The FDIC, as with many of the government financial organizations active in the U.S., was founded in the wake of the Great Depression. To get investors to return to the market in 1933 after years of bank failures, the federal government commissioned the FDIC to act as an insurer for banks. In the years before the FDIC existed, it was possible for customers to make a “run on the bank,” withdrawing too much money too quickly for the financial institution to stay open.

In these Depression-era bank failures, an initial threat to a bank’s integrity would be followed by concern among customers and a rush to withdraw the full balance of their accounts, according to Investopedia. Some people would be able to recover money, provided they got to the bank quickly enough. Depositors who arrived too late, however, may have found that the bank had shut down with no funds left and no insurance. Those customers would lose everything they had in their accounts.

The FDIC’s operations officially started January 1, 1934. Since that time, depositors in FDIC-insured banks haven’t lost any deposited money due to the failures of those institutions. The organization acts independently of government control, and funds itself through the fees it charges banks rather than appropriations authorized through Congress. Deposits are the only kind of property insured by the FDIC, as the organization does not handle investments such as securities or mutual funds.

What is the role of the FDIC today?

Today, the FDIC is based in Washington, D.C., but has many offices in multiple states. From these locations, it conducts its operations, which extend beyond insuring deposits. Though the modern financial climate has become more complex than the system that existed at the time of the Great Depression, the FDIC’s many roles remain a cornerstone of financial security for consumers. The following are the organization’s main duties:

Insurance against bank failures

Despite the FDIC’s diverse responsibilities, insurance remains its most widespread offering. It insures nearly every bank in the U.S., which means it is responsible for trillions of dollars in deposited money. The standard FDIC insurance amount for banks is up to $250,000 for each depositor, per bank and account category. The Balance noted that federal insurance for deposits could incentivize risky decision-making by banks that consider themselves fully insured against failure.

When a bank fails and is closed down by the state or federal agency that chartered it, the FDIC takes immediate action to protect the insured customers. The organization may sell the deposits and loans from the closing bank to another financial institution to ensure the depositors still have access to the money. The customers move over to the new bank, and ideally the process does not disrupt their financial status.

The FDIC has to deal with the risks created by offering this financial safety net for banks. The Balance noted that providing federal insurance for deposits could incentivize risky decision-making, namely because banks may consider themselves fully insured against failure. Therefore, the FDIC enforces a code of safe and responsible behavior for its insured financial institutions.

Supervision of banks

Other FDIC duties include the direct examination and supervision of banks to ensure they operate safely. The organization currently provides its oversight to approximately 4,000 banks, which amounts to more than half of the U.S. banking system. When banks are chartered by states, they can join the Federal Reserve System for regulation and oversight. State-chartered banks that don’t become part of the Federal Reserve are typically regulated by the FDIC.

Legal compliance investigations

In addition to its insurance and oversight duties, the FDIC serves as a regulatory compliance examiner. It checks to make sure banks are following government policies correctly and are serving their customers in a fair and legally sound capacity. Relevant laws include the Fair Credit Billing Act, the Fair Credit Reporting Act, the Truth-in-Lending Act, the Fair Debt Collection Practices Act, and the Community Reinvestment Act.

What do students learn about financial institutions in MSF courses?

Financial professionals who work at banks, government agencies, and related businesses need to deal with the FDIC in the course of everyday business. Due to the many roles served by the FDIC, individuals in the banking sector may communicate with the organization about finance and compliance investigations, the risk of bank failure, or the direct supervision of financial institutions.

When individuals who work in the financial system decide to advance their knowledge and expertise through graduate-level studies, they can pursue an Online MSF degree. By taking classes on a flexible schedule via asynchronous learning, they can fit studies into a full-time work schedule. The courses leading to such a degree include vital information on dealing with financial agencies such as the FDIC, reflecting their central role.

The Online MSF program at Northeastern University’s D’Amore-McKim School of Business features a core class titled Analysis of Financial Institutions and Markets which instructs students in the frameworks underlying the U.S. financial system, including the role of government-chartered agencies. The course gives professionals an up-to-date picture of the way domestic and foreign banking, investment, and trade work, including the role played by regulatory organizations.

Students can deepen their knowledge of the financial system in other core classes such as Financial Theory and Policy, Financial Strategy, and a Financial Seminar, which provide in-depth analysis of current financial literature. The information included in the Online MSF program may assist graduates as they seek new and more fulfilling roles in their industry of choice.

Recommended Readings:

The secondary mortgage market before and after the housing crisis

What is the Bretton Woods Agreement?

Sources:

Federal Deposit Insurance Corporation – Who is the FDIC?

Investopedia – Federal Deposit Insurance Corporation – FDIC – Definition

The Balance – What Is the FDIC and What Does It Do?

Northeastern University – MSF Curriculum