During the Great Depression of the 1930s, thousands of banks failed in the United States and millions of people lost their life savings because of these bank failures. In 1933, the federal government established the Federal Deposit Insurance Corporation to insure bank deposits against loss, but this insurance applies only to deposits in banks and savings & loans that are FDIC insured members. Since its inception, no depositor has lost money in an FDIC-insured deposit as a result of a bank failure.
Through December 31, 2013, all savings and checking accounts in FDIC member banks and savings & loans are insured up to $250,000 per depositor. On January 1, 2014, the insured amount will revert to its traditional $100,000 per depositor that existed prior to the credit crisis of 2008. The FDIC website has a calculator that you can use to make sure your deposits are insured.
The FDIC is supported by premium payments from the insured deposit institutions and by investing those premiums in US Treasury securities. All insured institutions must regularly report to the FDIC, enabling strict monitoring of their financial strength. When the FDIC notices a negative trend at one of its members, that institution is immediately placed on a watch list and if its financial strength continues to deteriorate, the FDIC will quietly arrange for that institution to be purchased by a financially strong institution and all insured deposits will be made whole.
Why Banks Fail
Banks and savings & loans take in deposits and use that money to fund loans for the purchase of consumer assets like homes and cars, as well as business and personal loans. During times of economic trouble, some borrowers will not be able to pay off their loans as agreed. If enough borrowers fail to make their payments, the bank that made the loans will likely fail. This is a situation that the FDIC carefully monitors, ready to move in to protect depositors' money whenever needed.
Money Center Banks
Large money center banks have large and diverse loan portfolios, often representing loans made to borrowers throughout the nation and the world. Because large lending institutions must be more aggressive in their lending activities in order to create enough revenues to support their extensive operations, these banks are often the first to suffer from an economic crisis.
Local and Regional Banks
Local and regional banks tend to be more selective about the risk they take in their loans. Though they may loan to a local business that cannot borrow money from a national bank, they make their loan decisions based on long-term banking relationships with those customers. Because of this, local banks tend to have fewer problem loans.
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