Whenever you’re checking out different bank accounts or looking into switching banks, you might see the phrase “FDIC insured.” If you’ve ever wondered what that actually means, then you’re not alone.
Let’s take a closer look at how the federal government oversees banking and what that means for people looking to invest their money into checking or savings accounts.
FDIC stands for the Federal Deposit Insurance Corporation. It was created by Franklin Roosevelt in 1933 to prevent a crisis like the Great Depression from happening again. The corporation insures the money that is kept in checking and savings accounts with American banks. The credit union equivalent of the FDIC is the National Credit Union Administration (NCUA).
When a bank is FDIC insured, it means that the money you bank with them is guaranteed by the federal government. If you want to withdraw money from your bank and they’re completely out of money, they can tap the FDIC insurance and get you your cash. This prevents a crisis like the 1929 banking panic. In that crisis, the stock market crash led to millions of people trying to withdraw cash from their banks all at once, draining banks of the capital they had on hand and leaving millions of people penniless.
FDIC insurance can cover four basic types of accounts: checking accounts, savings accounts, money market deposit accounts, and certificates of deposit. They don’t cover things like stocks, bonds, or other financial products that function as investments. That’s why investing your money in those is considered a risk: there’s no guarantee that you can get a return.
This means that whenever you’re looking for a new bank, you want to see the words “FDIC Insured.” Looking for the safest mobile checking account? Feel free to go in person, but get confirmation that the bank is insured. Looking for a low-fee reward checking account? Apply online, but make sure the account is FDIC insured first. This should be the most basic step in vetting financial institutions–and avoiding potential scams. Every legitimate bank will happily announce that their accounts are insured by the FDIC or NCUA.
The FDIC is the government’s way of keeping the American banking system running smoothly. A disaster like the Great Depression couldn’t happen again, in theory, because of the FDIC and other fiscal policies enacted in the 90 years since the crisis.