The independent Federal Deposit Insurance Corporation (FDIC) was created in 1933. The main goal of its creators was twofold: to insure depositors and make banking practice safe.
In the United States, bank oversight is divided among several government agencies. The most important agencies are:
- Office of Comptroller the Currency, OCC – a Treasury bureau responsible for issuing licenses, supervising and regulating the activities of national commercial banks that are members of the Federal Reserve System and are insured by the FDIC. Besides, OSS is constantly working on the study, promotion and legalization of modern methods of studying the state of banks;
- Federal Deposit Insurance Corporation – regulates and controls the activities of about 7000 banks, and not all of them are members of the Federal Reserve System. It acts as an insurer for all insured banks;
- Federal Reserve System, Fed – established in 1913, the US central bank combining federal and regional elements includes the Board of Governors, 12 regional reserve banks, 24 branches of reserve banks and about 5600 commercial member banks of the system;
- Office of Thrift Supervision, OTS – a federal agency created in 1989 to verify and supervise loan associations, federal savings banks. It acts as a bureau within the Treasury;
- The National Credit Union Administration’s Insurance Fund is an independent federal agency established in 1970 that registers and regulates credit unions, insures deposits in unions (through a special fund) and is the lender of last resort for them.
You should bear in mind that banks in the United States are under double control – federal and state. In addition to the mentioned state agencies, private insurance companies are also involved in the insurance of many banking risks.
So, the Federal Deposit Insurance Corporation was created by the US Congress as part of the adoption of the Banking Act of 1933. On March 3, 1933, the activities of banks in the USA were suspended. This was done after numerous banking disasters at the beginning of the Great Depression. It was clear that the country needed a system of guarantees of deposits in financial institutions, which, within a reasonable (expedient, possible, defined) extent, would ensure the safety of the savings of the population and access to them at the first request. June 13 of the same year, President F.D. Roosevelt wrote the Banking Act, which then became law.
The Corporation began work on January 1, 1934. And from the first day of its work, not a single depositor lost a cent from the accounts that were insured by it.
The system did not remain unchanged. In August 1989, US President George W. Bush signed into law the Reform of Financial Institutions Act (FIRREA). New structures and procedures were created that related to the protection of savings deposits, accumulation and loans for housing construction. This reform was dictated by the new economic conditions and the growing lack of conscientiousness in the financial sector due to the rapid emergence of ever new financial instruments – financial innovation of 70-80. Currently, FDIC has three main functions: (1) insures deposits with 98% of commercial and savings banks; (2) regulates the activities of more than 7,000 commercial banks and about 4,500 savings banks; (3) liquidates the assets of bankrupt banks.
FDIC operates two programs: Bank Insurance Fund, BIF, and Savings Association Insurance, SAIF. The basic amount of the insured deposit in each insured financial institution for one depositor today is $100 thousand. Deposit insurance does not cover in-vestment accounts, stock accounts, etc. (These accounts are insured by the Association of Stock Brokers even to a higher level). Creditors and shareholders of the bank are also not covered by this type of insurance. Investors can increase their security by opening accounts in different banks unless these are branches of the same bank.
The Bank Insurance Fund receives money in the form of an insurance premium from commercial banks. The second fund was created under the auspices of the FDIC to replace the bankrupt in the late 80s Federal Corporation of Loan and Savings Institutions. SAIF receives funds in the form of insurance premiums from savings banks, etc. Both funds are based on the obligation of the government to provide their guarantees with all revenues and possible borrowings of the state. In addition, the FDIC has the right to invest the accumulated temporarily available funds, has a credit line at the Treasury and may, as necessary, borrow money from the Bank for Federal Financing and the Federal Reserve System, as well as other sources.
The very idea of deposit insurance was not born in one day and not in order to solve the problems of the Great Depression. Experiments in this direction have been conducted in the state of New York since 1829. While America was a British colony, banking was prohibited in it. Barter was widespread. In the first years after independence, while the banking system was just in its infancy, bankruptcies in this area practically did not happen. The Americans were seriously puzzled by the bankruptcy of the Farriers Bank of Gloucester in Rhode Island in 1809. Until the end of the 19th century, inflation, devaluation, fraud, bankruptcy were common in the US banking system. Various state governments invented and launched various programs to protect society from the effects of these phenomena. The last of these programs was discontinued in 1930.
The federal government began to discuss the issue of deposit insurance as early as 1886. From that time until 1933 about 150 such projects were discussed. These discussions, as a rule, intensified after the next crisis. Lawmakers were unable to make decisions until the Great Depression put the country on the verge of collapse.
At the beginning of the twentieth century, an average of 82 US banks closed annually. In the 20s that were relatively successful for the country, this average approached 588, and in the period 1929-1933. this figure reached a huge value – 2277. In 1933, 4,000 American banks were forced to close their doors. Panicky depositors in a massive order seized their money from banks, which led to the immediate bankruptcy of individual banks, and then to the mass bankruptcies of interconnected banks.
In the fight against the flight of money from banks, the Federal Reserve began to issue more money. It did not help. On the sixth of March 1933, President Roosevelt announced a bank vacation. It seemed that all production collapsed. Unemployment has spread everywhere.
After the opening of the FDIC, the number of bank failures sharply decreased. Between 1934 and 1942, their average number was 43 per year. In the future, this indicator rose to 200 a year or more, but this was already due to many reasons that were not directly related to the banks. It is clear that stabilization of the banking system was achieved not only through the creation of the FDIC: a legal, methodological and organizational system was created that reliably focused on strengthening the confidence of the population and business circles to banks and government policy in this area.
In such cases, it is important for insurance companies to use their supervisor function, i.e. for the activities of insured banks. As you know, the insurer has the right to check the level of risks in the insured objects and to require compliance with reasonable safety rules. The level of deductible rates and other components of insurance contracts depends on how well the insurer is aware of the risk profile of the policyholder. In this sense, the supervision of the policyholder is one of the foundations of insurance. Bank inspections are the basis of the FDIC’s activities to maintain the reliability of banks and their compliance with the requirements of the law on the rights of consumers and citizens. About 120,000 employees work in FDIC’s 120 offices, 2,700 of which are high-class auditors. They conduct about 11,000 inspections and investigations per year. The main types of checks: security and reliability, protection of the rights of consumers and citizens, trust operations of a bank, security of electronic transactions. Using extensive, detailed and constantly updated analysis procedures and procedures, controllers check the adequacy of capital, asset quality, management, efficiency and liquidity. The basis of the checks is the KAMEL1 system. The methodological instructions for supervision are described in detail in the fundamental instruction OSS2. Based on inspections, FDIC is able to detect a problem in a timely manner, make recommendations on how to resolve it, develop and implement a restructuring plan, or launch a bank closure procedure. If the bank continues to carry out dangerous activities or violates the law, the FDIC may force the bank or its officials to take certain actions under the threat of very harsh civil punishments, dismissals or cancellation of deposit insurance. Criminal proceedings or submissions to the Federal Bureau of Investigation or to the prosecutor’s office may even be instituted. However, recommendations and warnings always come first. Since 1986, about 2,000 coercive measures have been taken, about a quarter of which was related to fraud.
In case of withdrawal of the license from the bank by the relevant authority due to its insolvency, the FDIC immediately takes measures to protect depositors. The agency has five main opportunities:
- Make a healthy purchase of deposits and related assets of a troubled bank. This measure is most often applied. FDIC develops the scheme and facilitates the transaction. Access of depositors to their deposits is not interrupted;
- Transfer insured deposits to a healthy bank in the same territory that served the problem bank. Assets are not sold but are taken under the control of the FDIC. Access of depositors to their deposits is not interrupted;
- Payment of insurance if it’s impossible to find a buyer or bank for the transfer. Such payments usually start 2-3 business days after the bankruptcy is filed. It rarely comes to this;
- FDIC can create an intermediate bank (bridge bank) under its management for a period of up to five years, during which it will continue to search for a buyer, transfer, merger. Customers of a bankrupt bank, in this case, continue to be served without interruption on the previous terms;
- Provide financial assistance to the troubled bank to overcome temporary difficulties.
All these measures and the fact of bankruptcy are quickly and widely disseminated to the public. A specific measure is always chosen based on the most economical approach. In its activities, the FDIC annually reports to Congress. The report is audited by the United States General Audit Agency.
The FDIC is headed by a board of five directors, the chairman is appointed by the President of the United States for six years as a member of the board and for five years as its chairman. The deputy chairman is appointed by the President with Senate approval for six years. Only three of the board members can belong to one party.
The organizational structure of the Federal Deposit Insurance Corporation:
- Department of Supervision;
- Liquidation Department;
- Legal Department;
- Wellness Department;
- Accounting and Corporate Assistance Department;
- Department of Research and Statistics;
- Executive Secretary Office;
- HR Office;
- Communications Office;
- Legislative Affairs Office;
- Office of the Inspector General;
- Equal Opportunity Office;
- Consumer Relations Office;
- Office of Planning and Budgeting;
- Office of Training and Educational Services.