FDIC stands for Federal Deposit Insurance Corporation.

What is It?

It’s an independent agency backed by the federal government.

What Does the FDIC Do?

In their own words from the FDIC Government website (we underlined what we thought was most important):

“The Federal Deposit Insurance Corporation (FDIC) preserves and promotes public confidence in the U.S. financial system by insuring deposits in banks and thrift institutions for at least $250,000; by identifying, monitoring and addressing risks to the deposit insurance funds; and by limiting the effect on the economy and the financial system when a bank or thrift institution fails.”

Why do I care?

They insure, up to a certain amount, the money you have on deposit at a bank.  This is protection against losing your money in the event of a bank failure. Most banks who carry insurance post the FDIC symbol somewhere on their bank literature (see above graphic).

The FDIC does not insure deposits at credit unions. Those are insured through the National Credit Union Administration.

The FDIC Just Helps me? Challenge.

No. While this is very important to you, the FDIC also fulfills another very  important function. When a bank fails, the FDIC will rescue it. The FDIC will try to find a partner to help the failed bank. They may have take any bad loans the bank has and sell the good  ones. They will work to silently salvage the bank.

They are like Superman. But with far less mystic since they work for the Federal Government.

Read: How the FDIC Rescues a Failed Bank

Why Do You Need to Be Protected Against a Bank?

Banks can fail. And a lot of them have.

Where Do Banks Put Your Deposits?

When you deposit your money in a bank, it’s not just kept in a big vaulted room. A funny man in a business suit does not dive into a pool of gold coins every night- though that would be fun.

Banks take the money from all of their depositors and they invest it. A big part of that investment is loaning your money to other people who need a loan (that’s how banks make money). You just hope your bank makes prudent investments/loans and is able to stay in business.

Why Do Banks Have to Invest Your Money—Can’t They Just Store It?

This may come as an unpleasant shock, but money does not grow by itself. You need to take some risk in order to make your money grow.

Banks pay you interest on your money. This indicates they are taking a small amount of risk with your money in order to pay you.

But, Most People Don’t Want to Take Risk With Their Money

They just want to store it. That is where the FDIC comes in! To promote a sense of calm (zen) in financial markets and facilitate deposits at banks, the FDIC has committed to pay you for the deposits you held at a bank up to 250,000 (though 12/31/09).

And that is per bank. So for every bank at which you have deposits, you are covered for up to 250K at each.

What Exactly Does FDIC Insurance Cover?

Checking and saving accounts, CDs and money market accounts (please note this is different than a money market mutual fund).

FDIC insurance does not cover investments (stocks, bonds, mutual funds), safety deposit boxes, and insurance products.

P.S. The FDIC was set up by Congress during the last great financial crisis—The Great Depression.