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The Federal Deposit Insurance Corporation (FDIC) is a United States government corporation created by the Glass-Steagall Act of 1933. It provides deposit insurance which currently guarantees checking and savings deposits in member banks up to $250,000 per depositor. The vast number of bank failures in the Great Depression spurred the United States Congress into creating an institution which would guarantee deposits held by commercial banks, inspired by the Commonwealth of Massachusetts and its Depositors Insurance Fund (DIF).
Historical insurance limits
- 1934 - $2,500
- 1935 - $5,000
- 1950 - $10,000
- 1966 - $15,000
- 1969 - $20,000
- 1974 - $40,000
- 1980 - $100,000
- 2008 - $250,000
The two most common methods employed by FDIC in cases of insolvency or illiquidity are the:
- Payoff Method, in which insured deposits are paid by the FDIC, which attempts to recover its payments by liquidating the receivership estate of the failed bank. These are straight deposit payoffs and are only executed if the FDIC doesn't receive a bid for a P&A transaction or for an insured deposit transfer transaction. In a straight deposit payoff, no liabilities are assumed and no assets are purchased by another institution. Also, the FDIC determines the insured amount for each depositor and pays that amount to him or her. In calculating each customer's total deposit amount, the FDIC includes all the interest accrued up to the date of failure under the contractual terms of the depositor's account.
- Purchase and Assumption Method (P&A), in which all deposits (liabilities) are assumed by an open bank, which also purchases some or all of the failed bank's loans (assets). There are several types of P&As: the Basic P&A: assets that pass to acquirers generally are limited to cash and cash equivalents. The Loan Purchase P&A: the winning bidder assumes a small portion of the loan portfolio, sometimes only the installment loans, in addition to the cash and cash equivalents. The Modified P&As: the winning bidder purchases the cash and cash equivalents, the installment loans, and all or a portion of the mortgage loan portfolio. The P&As with Put Options: to induce an acquirer to purchase additional assets, the FDIC offered a "put" option on certain assets that were transferred. The Whole Bank P&As: Bidders were asked to bid on all assets of the failed institution on an "as is", discounted basis (with no guarantees). This type of sale was beneficial to the FDIC for three reasons. First, loan customers continued to be served locally by the acquiring institution. Second, the whole bank P&A minimized the one-time FDIC cash outlay, and the FDIC had no further financial obligation to the acquirer. Finally, a whole bank transaction reduced the amount of assets held by the FDIC for liquidation. The Loss Sharing P&As: these use the basic P&A structure except for the provision regarding transferred assets. Instead of selling some or all of the assets to the acquirer at a discounted price, the FDIC agrees to share in future loss experienced by the acquirer on a fixed pool of assets.