FDIC for Business: A Brief History

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Your business is making money. Now, it’s your job to protect it. So, where do you turn? The FDIC provides some protection, but it’s limited to $250k. Some companies believe their funds are safe because they are in a large national bank. But history has shown this to be questionable.

Big Banks Provide the Same Protection as Small Banks

With the fear and anxiety of the last financial crisis still fresh in our minds, it’s tempting to be leery of banks. As we saw in the case of Bear Stearns and Lehman Brothers, there is no such thing as “too big to fail.” And for those of us who grew up with Depression-era parents and grandparents, we know the stories of bank closures and lost fortunes all too well.

But a lot has changed since then, especially in recent years, to ensure your company deposits are protected — guaranteed, in fact — by the U.S. government. And the responsibility of protecting them lies with the Federal Deposit Insurance Corporation, better known as the FDIC.

What’s the story behind the FDIC?

It begins long before the Depression wreaked havoc on our nation’s economy and struck fear into the hearts of individual investors and companies alike — back to 1809 when the first bank in the U.S. failed.

Back then, there was no insurance for the funds you deposited in a bank. If the bank failed, your money went down with it.

Over the next century, thousands of banks failed. Between 1921 and 1929, an average of 600 failed per year. And things only got worse from there. Between 1930 and 1933, roughly 9,000 banks failed. Yet again, there were no federal protections in place for the money housed within them. A few states tried to institute a system of insurance — 14 in total — with varying levels of success. But nothing existed to protect the masses, at a time when a massive amount of money needed to be protected. In the span of three terrifying years, depositors lost a total of $1.3 billion.

That’s when the federal government stepped in. The Emergency Banking Act of 1933 established the FDIC as a temporary agency. President Franklin D. Roosevelt wasn’t a fan of deposit insurance, but it was a clear crowd pleaser. The people wanted guarantees that their money was safe, and Roosevelt complied. He signed the act into law.

How has the FDIC evolved over time?

Perhaps the most striking evolution is in the amount covered by FDIC insurance.

In January 1934, the FDIC covered depositors up to $2,500. By 1939, that amount doubled to $5,000.

Fast forward 80 years, and the FDIC had increased its maximum insured deposit to $100,000. Then, with the Dodd-Frank Wall Street Reform and Consumer Protection Act, the limit was raised once again, to its current max of $250,000.

It’s important to note, though, that the current maximum of $250,000 is per depositor, per bank. Savvy investors can spread their money around to different banks to ensure all their money is protected, however, managing so many accounts can be a full-time job in itself. ADM’s proprietary technology, on the other hand, can ensure deposits as large as $75 million are covered by FDIC insurance with very little work on the part of your business — a huge benefit to businesses looking to protect their hard-earned capital.

How does the FDIC respond when a bank closes?

The FDIC is required by law to pay depositors “as soon as possible” after a bank is closed. That almost always means within a few business days — usually the next business day. In the era of Amazon Prime, that’s the kind of service we’ve come to expect from just about everything.

And it’s happened. Back in 1934, Lydia Lobsiger became the first insured depositor to get reimbursed by the FDIC — to the tune of $1,250.

The number of bank failures improved substantially until recent years, when the Great Recession hit. Between 2008 and 2012, 465 banks failed, including Washington Mutual, which had $307 billion in assets. In those instances, the FDIC is tasked with collecting and selling the assets of the failed bank and settling its debts. The FDIC also leans on its insurance fund — now worth about $11 billion — to repay depositors.

It’s important to note that not all the assets held within a financial institution qualify for FDIC insurance. It’s limited to certain kinds of accounts, including corporate accounts, individual savings and checking accounts, government accounts and a handful of others. Investment accounts, by and large, are not covered by FDIC insurance.

Why does this matter for me and my business?

It’s important to understand the strong foundation that supports the American banking system, to instill trust and inspire confidence. We have one of the strongest economies in the world, and when your business makes money, you have the power to protect it until you are ready to re-invest. Not every country can offer that, and we had to endure no small amount of hardship to get to this place of financial security.

And, as history has a habit of repeating itself, that security continues to be tested.

The good news, though, is you don’t have to navigate this space alone. When you find a treasury management and financial services company you trust, you can leave the worry behind and focus on what you do best: make your business a success.

Let ADM help you protect your company deposits. Visit our Deposit Management page for more details or talk with one of our friendly associates today.