Here’s how it works: NPR

An FDIC sign is displayed on a window of a branch of Silicon Valley Bank in Wellesley, Mass., Saturday. The bank was caught in a meltdown, forcing a government takeover. The FDIC guarantees accounts up to $250,000.

Peter Morgan/AP

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Peter Morgan/AP

An FDIC sign is displayed on a window of a branch of Silicon Valley Bank in Wellesley, Mass., Saturday. The bank was caught in a meltdown, forcing a government takeover. The FDIC guarantees accounts up to $250,000.

Peter Morgan/AP

The FDIC was created 90 years ago to help the United States through a disaster that bankrupted thousands of banks. Its mission is to prevent the panic and turbulence of collapsed institutions like Silicon Valley Bank, the second largest bank failure in US history, from spreading through the financial system.

Today, the agency is working again to convince citizens and businesses that their money is safe, in hopes of avoiding bank runs that would worsen the current banking crisis.

The FDIC is leveraging one of its main tools – deposit insurance – to help this cause, announcing that every account will be fully protected, even if deposits exceed its current limit of $250,000.

The FDIC exists to help the banking system deal with exactly this type of crisis: when it was created in 1933, some 4,000 banks had closed in the first few months alone.

Here’s an overview of how the FDIC and deposit insurance work to support banks:

Public trust has always been essential

“I can assure you, my friends, that it is safer to keep your money in a reopened bank than to keep it under the mattress,” President Franklin D. Roosevelt told the American public on March 12, 1933, in his very first “Chat by the Fireside”.

Fast forward 90 years, and the current president and the FDIC are once again working to convince citizens and businesses that their money is safe, in hopes of averting bank runs that would worsen the banking crisis.

Since the agency’s inception, deposit insurance has been seen as the key to bank customer confidence, which in turn has been the key to bank solvency.

“We knew how much the banking industry depended on the imagination,” said Raymond Moley, speechwriter and adviser to Roosevelt years later, “or, more conservatively, on the vital role that public trust had in solvency insurance”.

The plan worked: “Only nine banks failed in 1934, compared to more than 9,000 in the previous four years,” the FDIC said.

FDIC account limits have been multiplied by 7

The FDIC originally covered accounts up to $2,500 for each depositor at an insured institution in 1934, the year federal deposit insurance came into effect. But in July of the same year, the maximum was doubled to $5,000.

Both of these amounts were below the original goal, which was to provide “full protection for each depositor’s first $10,000, 75% coverage of the next $40,000 of deposits, and 50% coverage of all deposits.” greater than $50,000,” according to the FDIC.

By lowering the maximum, regulators also lowered the tax rate banks would have to pay each year. Proponents of the idea said reforms and greater geographic diversity, among other factors, meant banks would not fail as often, justifying a lower valuation.

Here is a summary of the upcoming increases:

• 1950: goes to $10,000
• 1966: $15,000
• 1969: $20,000
• 1974: $40,000
• 1980: $100,000
• 2008: $250,000

FDIC insurance covers a range of accounts

The FDIC says it provides coverage for:

• Verify Accounts
• Savings accounts
• Money Market Deposit Accounts (MMDA)
• Certificates of deposit (CDs) and similar “time deposits”
• Cashier’s checks, money orders and similar banking tools
• Negotiable Withdrawal Order Accounts (NOW)

Deposit insurance does not apply to investment instruments such as stocks, bonds, mutual funds and annuities. It also does not apply to safe deposit boxes and municipal securities.

The FDIC “directly supervises and reviews more than 5,000 banks and thrift associations” to ensure they are safe and financially sound. The institutions themselves “may be licensed by the States or by the Office of the Comptroller of the Currency”.

The FDIC is financed by the banks

The Federal Deposit Insurance Corporation is an independent government agency. It was created by Congress, but it does not get its money from Congressional appropriations.

Instead, banks and thrift associations pay FDIC insurance premiums to cover their customers’ deposits, which total trillions of dollars.

“What the bank has to do is pay the FDIC an insurance premium,” John Bovenzi, who was then the FDIC’s chief operating officer, told NPR in 2009.

“So we charge the bank 12 cents for every $100 you deposit in the bank as insured money,” Bovenzi said. “It allows us to build up our insurance fund to pay the costs when we have problems like bank closures, where we then have to reimburse people for their money.”

The purposes of the FDIC have long been debated

From the start, a debate has persisted over how far the FDIC should go to protect the broader economy, with critics citing the dangers of encouraging risky behavior.

Early opponents included Roosevelt himself. As the FDIC’s internal history indicates, the president and his allies “believed that a deposit insurance system would be unduly costly and unfairly subsidize poorly managed banks.”

But in the face of public opinion, Congress approved a plan to create the Federal Deposit Insurance Corporation, and Roosevelt formalized it by signing the Banking Act of 1933.