The Federal Deposit Insurance Corporation was created by the Banking Act of 1933 in response to the banking crisis that faced the nation after the stock market crash on Black Tuesday, October 29, 1929. Although the FDIC has grown and changed since then, its purpose is still the same – to guarantee the safety of bank deposits up to a certain amount. Until recently, that amount was $100,000 but Congress, in response to the current economic crisis has temporarily increased FDIC deposit insurance from $100,000 to $250,000 per depositor through December 31, 2009. (Who, n.d.)
All of the banks that are members of the FDIC must adhere to certain liquidity and reserve requirements in order for the banks and their depositors to benefit from the insurance. (Overview, n.d.) If a bank becomes undercapitalized the FDIC issues a warning. If the undercapitalization worsens it can take other corrective measures which may ultimately result in the FDIC taking over management. All of this is meant to sustain the confidence of depositors so that there are no runs on the banks as so often happened in past history.
The History of the FDIC
To understand the importance of the Federal Deposit Insurance Corporation in today’s economic market one must look to the history that led up to its establishment as part of the Banking Act of 1933. After the crash of the stock market in 1929 the United States fell into the longest economic depression in its history – from 1929 to 1939. Since loans that were made to stock market speculators were not being repaid after the crash, many banks failed and bank panics were commonplace. This led to their depositors’ losing money, which only served to fuel the depression further.
The bank failures of the early 1930s were not the first in the history of the United States, but they were the most severe to date. President Franklin Delano Roosevelt saw the need to stem the tide of failures by enacting the Banking Act of 1933. Part of this act established the FDIC, gave it authority to regulate and insure banks, and the act also provided its funding.
The purpose of the FDIC was to build the confidence of the American people in their banks and to assure them that their funds would be safe, at least up to a certain amount. (FDIC Timeline, n.d., 1930) This is still the general purpose of the FDIC, although much has changed since its birth in 1933. According to the FDIC website “since the start of FDIC insurance on January 1, 1934, no depositor has lost a single cent of insured funds as a result of a failure.” (Who, n.d.)
When the FDIC was established in 1933 it was a temporary agency. But just two years later the Banking Act of 1935 made it a permanent agency. (FDIC Timeline, n.d., 1930) This was the first of many changes and adjustments to the FDIC over the years. The Federal Deposit Insurance Act of 1950 raised the insured amount to $10,000 and that amount has increased steadily until now, it is $250,000. The 1950 legislation also gave the FDIC “the authority to lend to any insured bank in danger of closing if the operation of the bank is essential to the local community, and authorized the FDIC to examine national and state member banks for their insurance risk.” (Important, n.d.)
In 1989, in response to the savings and loan crisis gripping the nation, the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) added two more functions to the FDIC, eliminating the Federal Savings & Loan Insurance Corporation (FSLIC). The FDIC was given the authority to oversee and administer two other insurance funds that replaced the FSLIC – the Savings Association Insurance Fund (SAIF) and the Bank Insurance Fund (BIF). (FDIC, n.d.)
Still more powers were given to the FDIC by the Federal Deposit Insurance Corporation Improvement Act (FDICIA) of 1991. This act addressed issues that the FIRREA did not, giving the FDIC more authority as well as more obligations. The FDIC continued to grow both in funding and authority until it reached the status that it holds in our economy today.
The Structure of the FDIC
The FDIC of today is run by a five-member board of directors headed up by Chairman of the Board, Sheila C. Bair who has been in that post since she was sworn in on June 26, 2006. She will serve a five year term and at the expiration of that term, she will remain on the Board of Directors until 2013. Each Chairman of the Board is appointed by the President to serve a five-year term and each appointment is subject to the approval of the US Senate. (Barrymore, n.d.) Since the chairman is appointed by the President, she can also be removed by the President.
The other members of the Board are the Vice Chairman Martin J. Gruenberg, Director Thomas J. Curry, Comptroller of the Currency John C. Dugan, and Director of the Office of Thrift Supervision John M. Reich. (Board, n.d.) The Board meets about once a month in either open or closed meetings. The public may attend open meetings as a result of the Government in the Sunshine Act. (FDIC Board Meetings, n.d.) In 2008 there were ten open meetings held.
The FDIC has seven divisions. The Division of Finance directs the accounting and auditing aspects; the Division of Information Technology oversees and maintains the computer network of the organization; the Division of Administration provides administrative support; the Division of Supervision and Consumer Protection conducts reviews to assure that each bank is sound and that its internal controls are adequate; the Division of Resolutions and Receiverships goes into action when a bank is in danger of failing; the Legal Division handles the corporations litigation; and the Division of Insurance and Research keeps an eye on the economic health of the nation, examining business activity, markets, etc. (FDIC Divisions, n.d.)
To run these seven divisions the FDIC employs about 5,000 people in its Washington, D.C. headquarters as well as in six regional offices and in field offices around the country. (Who, n.d.)