Finance & Loans

A Brief History of Deposit Insurance

This article was written by Phineas Upham

In response to what Roosevelt called “undermined confidence on the part of the public,” and the general rush on assets that followed, he asked most state governors to suspend all banking activity in 1933. By March 3^rd of 1933, there was hardly a bank open to do business. Roosevelt’s banking holiday was just the beginning of the much broader polices that created the FDIC program.

The FDIC provides deposit insurance on a banking transaction. That means that a customer can deposit, as of 2013, $250,000 dollars and expect that money to be returned on hand when requested. The organization also supervises certain financial institutions, inspecting them for soundness.

Additionally, the FDIC is called upon to manage failed banks.

The program is not given any federal funding. The money for FDIC comes from the banks that pay for it, except for credit unions which have their own agency. FDIC insurance is taken for granted today, but it played an important part in the economy of Depression era America.

At the time, banks were routinely run of their money and often yielded less than the deposits they took in. Few banks were spared from runs, and Roosevelt used FDIC programs to try and restore some faith in banking.

Until 2005, it was not possible for the FDIC board to readjust their rates for inflation. That put legislators in a tricky position, as they had to continually revisit the issue and raise rates accordingly. The FDIC Reform Act of 2005 gave the agency the power to consider inflation every five years. In this way, insurance is routinely raised to cover potential amounts the average customer is likely to make in his lifetime.

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About the Author: Phineas Upham is an investor at a family office/hedgefund, where he focuses on special situation illiquid investing. Before this position, Phineas Upham was working at Morgan Stanley in the Media & Technology group. You may contact Phineas on his LinedIn page.