The Federal Deposit Insurance Corporation (FDIC) history can be traced back to 1933, during the era commonly referred to as the Great Depression. The FDIC was established by the Banking Act, passed that year, to protect the economy about future loss situations of the magnitude of those experienced between the years of 1929 and 1933.
Factors Leading to FDIC Formation
The federal government attempted unsuccessfully to pass legislation calling for deposit guarantee several times during the five decades before FDIC history began. Several states did implement deposit guarantee programs during the late 19th century and very early 20th century years, but none of these plans were still viable by the time the Federal Banking Act was passed in 1933. By 1933, the financial situation in the United States was so dire that the need for banking reform and deposit insurance was widely recognized.
Financial Situation of the Times
- The stock market crash of 1929 set into motion a chain of events that resulted in devastating financial consequences.
- Between 1929 and 1933 it is estimated that 9,000 banks failed.
- Approximately 4,000 of these closures happened in the first few months of 1933.
- Bank customers lost an estimated $1.3 billion dollars in uninsured funds between 1929 and 1933. (For the sake of perspective, it's important to keep in mind that this amount is reported in real dollars for the time in which the loss was incurred, rather than being adjusted for modern day inflation.)
Understanding FDIC Background
Since the beginning of FDIC history, its purpose has remained steadfast. The organization serves a dual purpose of insuring deposits in banks and mitigating the economic consequences to consumers in the event of financial institution failures.
Early Days of the FDIC
In the early days following the Great Depression, the banking industry was characterized by caution. FDIC insurance handled 370 bank closures during its first seven years of operation. The regulatory environment emphasized close supervision of banking practices and maintenance of appropriate competition among banking institutions. Laws were passed that prohibited many of the practices believed to be responsible for the problems leading up to the U.S. financial crisis of the 1930s. Banks were also cautious. They were very careful about lending money and focused instead on building sufficient cash reserves.
Mid-20th Century FDIC History
1940s and 1950s: From 1942 until 1945, bank assets increased significantly, largely due to the roles United States banking institutions played in wartime financing. Loan losses declined to nearly nothing during these years, and the number of insured banks to go into failure declined to 28. By 1945, assets held by banks were almost double the level they had been in 1941. Lending practices remained conservative throughout this period, gradually increasing as bank solvency increased and a sense of security began to come back to the banking industry. Things stayed relatively constant throughout the 1950s. 1960s: The decade of the 60s ushered in a significant change in the atmosphere of the banking industry. During this time, banks began to adopt more aggressive growth strategies, which resulted in increased risk taking. The regulatory environment relaxed, placing more enforcement responsibility for monitoring and enforcement on regulatory agencies. During this time, the stage was set for the development of bank holding companies, which allowed a different way for financial institutions to operate multiple offices and go into additional markets.
1970s: The U.S. economy slipped into a significant recession, lasting from 1973 to 1975. During this time banks began to see an increase in loan losses and other problems leading to an increase in bank failures. In 1976 alone, the FDIC handled 16 bank failures, marking the highest number in a single year since 1940.
Even following the recession of the 1970s, the U.S. economy did not bounce back to the state it was in during earlier decades. Rising oil prices led to a sharp increase in interest rates, which led to a slowing in bank deposits as investors turned to investments believed to be much more lucrative. During the same time, the federal government began to increasingly deregulate the banking industry.
1980s and 1990s: The economy fell into a severe recession in the early 1980s. During this time, interest rates remained quite volatile. Bank loan charge offs increased by 50 percent, throwing many financial institutions into insolvency situations. In 1982, the FDIC handled 42 bank failures. The economy began to improve in 1983, but still 27 banks failed during the first part of the year.
During the 1980s and 1990s, the economy began to recover, restoring prosperity and a reduction in the need for FDIC actions. During this time, however, lending regulations continued to de-regulate, setting the stage for financial turbulence in the 21st Century.
The FDIC in the 21st Century
As the new century came in, a new era in FDIC history began. During the early parts of the 21st century, the sub-prime mortgage market reached an all-time high, resulting in a period of perceived economic prosperity followed by a lending crisis the likes of which had never been seen before. Referred to as the mortgage meltown of 2007, loan default rates set into motion a chain of events that led to the failure of many of the nation's financial institutions.
In the 21st Century, the FDIC remains as a powerful protection for consumers, insuring deposits up to predetermined limits in banks. The FDIC history continues to evolve with the times. For example, on October 3, 2008, as part of an unprecedented government bail out package, FDIC insurance protection was temporarily increased to $250,000 per depositor at insured financial institutions. The previous limit was $100,000. Only time will tell how FDIC history and its role in consumer protection will evolve in the future.