After the stock market crashed in the 1920’s, a lot of people lose mass amounts of their savings. Even businesses that had captive insurance really struggled to try and get back on their feet. After this, the government decided to do something so that a disaster like this could never happen again. Franklin Roosevelt signed into law the Banking Act of 1933. This act created the Federal Deposit Insurance Corporation, also known as the FDIC. The FDIC was originally meant to be a temporary organization, but it became permanent before the end of the decade.
So, what was the FDIC for? Basically, it was to protect people’s investments. In the beginning, the investments were only protected up to $2,500. Over the years, with inflation and as people’s incomes have increased, this number has increased to $250,000.
In the 1980’s, when the insurance rate was $100,000 (which, incidentally, it stayed at until 2008 when it was increased to the current rate), the Savings and Loan crisis occurred. What happened is that over 700 Savings and Loans corporations totally crashed and burned. People lost their savings, but the FDIC was put to the test; they recovered a good portion of what people had previously lost.
So, what does this insurance do in order to keep your funds safe? They classify the banks into different categories based on their financing. When they hit the “critically undercapitalized stage (When their risk capital ratio is less than 2%), the FDIC takes the bank over. Then, they employ two methods of redistribution of funds from banks that are taken over. They either sell to other healthy banks that can take things over, or the FDIC pays out everything that the consumers are owned and liquidate what the bank had before being taken over.