Pros and Cons of Federal Deposit Insurance Corporation

Topics: Federal Deposit Insurance Corporation, Banking, Deposit account Pages: 3 (924 words) Published: August 20, 2007
ederal Deposit Insurance Corporation (FDIC) is a United States government corporation created by the Glass-Steagall Act of 1933. 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 Deposit Insurance Fund (DIF). The FDIC provides deposit insurance which currently guarantees checking and savings deposits in member banks up to $100,000 per depositor. 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. Purchase and Assumption Method, in which all deposits are assumed by an open bank, which also purchases some or all of the failed bank's assets. #

As a result of the Great Depression, Republican Senator Arthur Vandenberg and Democratic Representative Henry Steagall strived to restore public confidence after a massive series of bank runs in early 1933 caused 4,004 banks to close, with an average of $900,000 in deposits. These banks were merged into stronger banks; many months later, depositors received compensation for roughly 85% of their former deposits.

In May, the U.S. House Banking and Currency Committee submitted a bill that would insure deposits 100 percent to $1,000,000, and after that on a sliding scale; it would be financed by a small assessment on the banks. However the U.S. Senate Banking Committee reported a bill that excluded banks that were not members of the Federal Reserve System. Senator Vandenberg rejected both bills because neither contained a ceiling on the guarantees. He proposed an amendment covering all banks beginning using a temporary fund and a $2,500 ceiling. It was passed as the Glass-Steagall Deposit Insurance Act in June with Steagall's amendment that the...
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