What is the FDIC?

What is the purpose of the FDIC?

1 Answer

FDIC is short for the Federal Deposit Insurance Corporation. The primary purpose of the FDIC is to protect the money you've deposited into an FDIC-insured bank in case they go out of business.

Here's a good example of why the FDIC is needed. In the late 1970's and early 1980's many people had deposited their money into a type of financial institution called a Savings & Loan (S&L). This trend started because the S&L companies were paying their customers higher interest on their deposits than other places like banks or credit unions.

Then, in the mid-1980's when the economy was struggling and most prices went up, rising interest rates made it difficult for the Savings & Loans to continue to pay such high interest rates on deposits. Since they could no longer afford to pay more competitive rates, many people pulled out large amounts of money and transferred it to their banks. Since financial institutions depend on money in deposits in order for them to make loans and earn interest on those loans, this sudden drop in deposits made it difficult for them to make enough loans to make money. So, many S&Ls closed their doors and went out of business! Many people who still had money deposited with these closed Savings & Loans lost all of their money. It gets worse - that money wasn't insured at all because S&Ls didn't have a company like the FDIC to make sure that people were safe100,000, are fully insured. This means that even in the unfortunate event that your parents' bank went out of business, they wouldn't lose any money. The FDIC would replace it Each person's deposits, up to $100,000