Question

In a program of deposit insurance as it is operated in the United States, what is being insured and who pays the insurance premiums?

Short answer

In the United States' deposit insurance program, operated by the Federal Deposit Insurance Corporation (FDIC), various types of deposit accounts such as checking accounts, savings accounts, money market deposit accounts, and certificates of deposit (CDs) are insured. The coverage includes the depositor's principal balance and any accrued interest up to $250,000 per depositor, per insured bank, for each account ownership category. The insurance premiums for this program are paid by the banks and other financial institutions that offer insured deposit accounts, and they contribute to the Deposit Insurance Fund (DIF) managed by the FDIC.

Step-by-step solution

Introduction to Deposit Insurance Program in the United States

The United States has a deposit insurance program that protects depositors' money in banks and other financial institutions. This program is operated by the Federal Deposit Insurance Corporation (FDIC), an independent agency of the U.S. government. The FDIC was created in 1933 to restore public confidence in the nation's banking system after the Great Depression. This program provides coverage, up to certain limits, for the money that people have deposited in banks and other financial institutions in case of a bank failure.

What is being insured?

Under the deposit insurance program in the United States, the FDIC insures various types of deposit accounts, including checking accounts, savings accounts, money market deposit accounts, and certificates of deposit (CDs). The insurance provided by the FDIC covers the depositor's principal balance and any accrued interest up to the maximum insured coverage limit, which is currently $250,000 per depositor, per insured bank, for each account ownership category. It's important to note that not all financial products offered by banks are insured by the FDIC. Some examples of non-insured products are stocks, bonds, mutual funds, life insurance policies, and annuities.

Who pays the insurance premiums?

The insurance premiums for the U.S. deposit insurance program are paid by the banks and other financial institutions that offer insured deposit accounts. These institutions are required to maintain a certain amount of capital, and they contribute to the Deposit Insurance Fund (DIF) managed by the FDIC. The banks' contributions are based on their size and the level of risk they present to the fund. Essentially, the cost of providing deposit insurance is borne by the banks and is reflected in the interest rates and fees they charge their customers. In summary, the U.S. deposit insurance program insures various types of deposit accounts, protecting depositors' money in case of a bank failure. The insurance premiums are paid by the banks and other financial institutions that offer insured deposit accounts. The FDIC oversees the program and manages the Deposit Insurance Fund used to cover potential losses.