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Monday, March 25, 2013

Federal Deposit Insurance for Banks and Credit Unions

Darryl E. Getter
Specialist in Financial Economics

The federal deposit insurance system in the United States protects depositors from losses that would occur in the event that a financial institution becomes insolvent, meaning that the institution’s lending activities did not generate enough revenue to repay depositors their principal and interest. By guaranteeing depositor accounts up to a set limit, deposit insurance may also help prevent “runs,” which occur when bank customers lose confidence in the ability of a financial institution to repay its depositors and rush to withdraw deposits. A bank run, or panic, can spread and threaten the solvency of other financial institutions should the public also doubt their soundness, thus suddenly and simultaneously withdrawing deposits from those institutions as well. In other words, deposit insurance aims to promote and help maintain public confidence in the U.S. financial system, particularly at times when some depository entities suffer large losses or become insolvent.

The Federal Deposit Insurance Corporation (FDIC) was established to insure bank deposits as an independent government corporation under the authority of the Banking Act of 1933, also known as the Glass-Steagall Act (48 Stat. 162, 12 U.S.C.). The FDIC is not funded by appropriations; it is funded through insurance assessments collected from its member depository institutions and held in what is now known as the Deposit Insurance Fund (DIF). The proceeds in the DIF are used to pay depositors if member institutions fail.

The Federal Credit Union Act of 1934 (48 Stat. 1216) formed a national system to charter and supervise federal credit unions. The National Credit Union Administration (NCUA), which administers deposit insurance for credit unions, became an independent federal agency in 1970 (P.L. 91-468, 84 Stat. 994). The NCUA is not funded by appropriations, but through insurance assessments collected from its member credit union institutions and held in what is now known as the National Credit Union Share Insurance Fund (NCUSIF). Proceeds from the NCUSIF are used to pay share depositors if member institutions fail.

Beginning in 2008, the number of bank failures increased substantially, and the DIF fell below its statutory minimum requirement. Credit union failures also increased, and five large corporate credit unions were placed under conservatorship by the NCUA. The 111
th Congress subsequently provided both the FDIC and the NCUA with greater ability to replenish the insurance funds and stabilize liquidity among depository institutions through a variety of measures. Should insurance claims (resulting from failures) exceed the sizes of the insurance fund reserves, additional legislative action may be necessary for one or both agencies to continue to resolve failed institutions.

Current congressional interest in deposit insurance relates to oversight of how the FDIC and the NCUA protect deposits and address solvency issues associated with their insurance funds. This report provides an overview of the FDIC and NCUA, the status of both the DIF and NCUSIF, and describes the procedures followed to resolve failed depository institutions. Appendixes to this report describe measures taken to reduce the loss exposure and total risks to the funds.

Date of Report: March 12, 2013
Number of Pages: 25
Order Number: R41718
Price: $29.95

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