Understanding FDIC Protection

Forbright Bank is one of the many members of the Federal Deposit Insurance Corporation (FDIC), a government agency dating back to the Banking Act of 1933 . The purpose of the FDIC is to protect consumer deposits in the case of a bank failure.

In its 90-plus years of existence, the FDIC has never failed to pay consumer deposits within its set limits during a bank failure, including the more recent collapse of Silicon Valley Bank in 2023.

At Forbright Bank and other member institutions, customers don’t need to apply for FDIC insurance. The federal protection automatically extends to customer deposits, covering up to $250,000 per depositor, per ownership category.

It’s not unusual to have questions about how FDIC insurance works to protect your money. Find answers to some of the most common questions below.

According to the FDIC, the current standard deposit insurance coverage limit is $250,000 per depositor, per FDIC-insured bank, per ownership category. An ownership category is defined as the general manner in which you hold your funds at a bank. Ownership categories include a single account, a joint account, and others.

Deposits held in different ownership categories are insured separately, up to $250,000 , even if held at the same bank.

Does the FDIC cover interest I’ve earned on my savings, or only the original principal?
The FDIC insurance covers both the interest and principal, so long as the total amount is below the maximum insured limit. In other words, if you’ve put $50,000 into a high-yield savings account and earned $2,000 of interest so far, the full $52,000 is insured because it falls within the current limit mentioned in the previous answer.
 
Are there ways to increase the FDIC protection limit?
Each individual has a $250,000 limit, per FDIC insured bank. According to the FDIC, a simple way to increase this limit is to add a joint owner because each co-owner is insured up to $250,000.

For example, if you and your partner are joint owners, the FDIC protection limit adds up to $500,000.

What happens during a bank closure? Are FDIC payouts taxed?

The FDIC typically pays insurance within a few days of a bank closure, either by providing customers with new accounts that have their money at another insured bank or by issuing a check for the insured balance. In either case, these payouts are not taxed.

The FDIC also acts as the receiver of the failed bank, so it assumes the task of sorting out the failed institution’s assets. This often means trying to sell them to another buyer, such as a different bank. 

Does the FDIC try to keep banks from closing in the first place?
Yes, member institutions pay premiums to the FDIC and become subject to agency oversight to ensure operational soundness. That supervision has proved effective: When federal deposit insurance and oversight began in 1934, just four U.S. banks failed in the following 12 months – versus more than 9,000 in the preceding four years.

How is the FDIC funded?
The FDIC draws funding from the Deposit Insurance Fund (DIF), which today insures roughly $9 trillion in deposits across thousands of member banks. Payouts during a bank failure, as well as FDIC operating expenses year-round, come from the DIF.

As of mid-2023, the DIF held roughly $117 billion . Federal law stipulates a designated reserve ratio of at least 1.35% (that’s a ratio of the DIF balance against total insured assets), though heavy growth in insured deposits during the COVID-19 pandemic – coupled with payouts for an uptick in bank failures – have diminished the ratio of late. 
 
The DIF has historically paid out 100% of insured funds to account holders every time a member bank closed its doors. That’s occurred even during times of high banking stress – when more than 1,600 FDIC-insured banks closed between 1980 and 1994, for example, or during 400-plus bank failures between 2008 and 2011.
 
Does DIF money come from taxpayers?
The government usually fully funds the DIF by charging insurance premiums in the form of quarterly assessments to its member banks. In the event of a large-scale banking collapse, the FDIC has the authority to borrow up to $100 billion for insurance losses from the U.S. Treasury. That’s a line of credit the FDIC has periodically exercised during times of financial stress.

For more information, please visit FDIC.gov .

This article is for general information and education only. Examples do not constitute investment advice.