CHAPTER VII

WHY WAS THE FEDERAL DEPOSIT INSURANCE ACT PASSED?

112. What problems emerged in the banking system in the twenties?
The transformation of the banking system into a credit mill fueling the wildly inflating stock market—via call loans to brokers—revealed fundamental weaknesses when the stock market collapsed. Together with mistaken Federal Reserve actions the collapse of the market weakened many banks to the point of bankruptcy. After the bank holiday several emergency legislative efforts were made to improve the banking system mid to protect the banking public.

113. What changes were made by the Banking Act of 1933?
This act prohibited interest on demand deposits in order to prevent unsound cornetist for demand deposits, and also as compensation to the banks for having to pay the fee for insuring deposits. In addition, the Federal Reserve Board was given power to change reserve requirements, subject to approval by the President. Also, in turn, investment bankers were prohibited from accepting public deposits. The most important part of the Banking Act of 1933, however, was the establishment of a temporary deposit insurance plan which went into effect on January 1, 1934. This was made permanent by the Banking Act of 1935 which established the Federal Deposit Insurance Corporation.

114. What is the Federal Deposit Insurance Corporation?
A Government-sponsored corporation to provide insurance for depositor of funds in banks against the lose of such funds, up to $10,000.

115. What is an insured bank?
A bank is insured when it complies with FDIC rules and becomes an insured member of the organization. In selecting members, the FDIC considers the adequacy of the bank’s capital structure, its earnings prospects, and the general character of its management. At the end of 1962, 13,455 banks were members, while only a few hundred small banks had not joined.

116. What is an insured deposit?
When a bank becomes a member of the FDIC each individual deposit in time bank is insured up to $10,000.

117. What happens if an insured bank fails?
Depositors receive the full amount of their deposits, up to the maximum of $10,000 per deposit, usually within 10 days to 2 weeks. If the FDIC desires it may set up a new bank in the community.

118. How many insured banks have failed since 1933?
Four hundred and forty-seven (as of December 31, 1963).

119. Where does the FDIC get its money?
From assessments on insured banks, and interest on U.S. Government securities it holds.

120. Where did the FDIC get money to start operations?
The Treasury purchased $150 million of stock in the FDIC, and the Federal Reserve, on instructions of Congress bought $139 million of stock. This stock was repaid by the FDIC in 1947 at 2 percent interest.

121. How much do the insured banks pay the FDIC?
Insured banks pay annually a gross assessment of one-twelfth of 1 percent of their total deposits.

122. Is the FDIC subsidized by the Federal Government?
Yes. Although it paid back the original $289 million of stock several subsidies remain. The fact that the FDIC gets half its total income from Government securities itself represents a sizable subsidy.

123. What direct commitment does the Treasury have to the FDIC?
The 1947 amendments to the Federal Deposit Insurance Corporation Act provide that the FDIC can borrow up to $3 billion from the U.S. Treasury at its discretion. The law directs the Secretary of the Treasury to put up this $3 billion any time the FDIC wants it.

124. Does FDIC regulate and control insured banks?
Yes. Under the provision of the act which allows the FDIC to see to it that banks do not engage in “unsafe and unsound practices in conducting business” and which allows it to lay down basic requirements for membership, the FDIC has come to regulate the, banks rather completely. The FDIC can prevent banks from making investments its examiners deem undesirable. And, FDIC conservatism is making it more and more difficult for small businessmen and farmers to get the financial assistance they need.