If you’re banking in the U.S., you’re probably familiar with the Federal Deposit Insurance Corporation (FDIC). This government agency insures your deposits, meaning if your bank goes belly up, you won’t lose your money. But how reliable is this insurance, really? Especially if the economy tanks and banks start failing left and right?
Well, the FDIC has a pretty solid track record. Since it was established in 1934, it’s always compensated customers of failed banks up to the insured limit, which is currently $250,000 per account owner, per bank. But that doesn’t mean it’s foolproof.
Looking at the FDIC’s performance since 2002, including during the worst financial crisis since the Great Depression, gives us some insight. Banks that are part of the FDIC pay into a deposit insurance fund, kind of like how employers pay into unemployment insurance. In good times, the fund is comfortably in the black. But in bad times, like the financial crisis of the late 2000s, it can go into the red. When that happens, the federal government steps in to make sure the FDIC can keep compensating bank customers.
Before the financial crisis, the FDIC’s deposit insurance fund balance hovered around $50 billion. But between 2008 and 2010, over 300 banks went under, and the fund balance plummeted from $52.4 billion to -$20.9 billion. Thanks to federal support and a plan to regain solvency, the fund balance recovered a bit in 2010 and turned positive in 2011. Since then, it’s been growing steadily, reaching $125.5 billion in late 2022.
The trend in total FDIC-insured deposit balances is a bit different. It rose steadily from about $3.38 trillion in 2002 to $4.75 trillion in 2008, then accelerated during the financial crisis and its aftermath, peaking at $7.4 trillion in 2012. Then it dropped to about $6 trillion in 2013, likely because consumers started putting more money into stocks and housing as the economy recovered.
The FDIC’s reserve ratio, or the value of the deposit insurance fund divided by the total deposit balance at FDIC-member banks, is another important metric. The FDIC’s target for this ratio is 2%, at which point the fund is considered "full" and bank assessment rates decrease. But in reality, the ratio has been below 1% from 2008 to 2013 and hasn’t come close to the 2% target since 2022.
From 2002 to late 2022, 557 FDIC-member banks failed, most of them during the financial crisis and its aftermath. But since 2017, only eight banks have failed. The FDIC deposit insurance fund has lost about $73.38 billion since 2002, but it only has to replace covered customer deposits, not all assets lost by failed banks.
So, should you be worried about the FDIC not being able to back you up if your bank fails? I wouldn’t be, at least not in the near future. Banks are failing much less frequently than they used to, and even during major financial crises, the FDIC has managed to compensate depositors. The biggest risk to the FDIC is likely a U.S. government debt default, which could complicate a federal rescue. But for now, there are more important things to worry about, financially speaking.
