How Are Your Savings Kept Safe?
After the stock market crashed in the 1920’s, a lot of people lose mass amounts of their savings. Many businesses really struggled to try and get back on their feet. After this, the government decided to do something so that a disaster like this could never happen again.
Franklin Roosevelt signed into law the Banking Act of 1933. This act created the Federal Deposit Insurance Corporation, also known as the FDIC – yes, the organization you see listed at places like Columbia Bank Woodbridge. The FDIC was originally meant to be a temporary organization, but it became permanent to protect your savings.
So, what was the FDIC for? In short, it was developed to protect how much people were saving in these institutions. It started at $2,500 of protection, and it is now up to $250,000, in order to match how incomes have increased.
The Savings and Loan crisis happened in the 1980’s, when the rate for FDIC insurance was $100,000. Over 700 Savings and Loans companies tanked. People lost their savings, and the FDIC was put to the test when they helped recover the majority of what people lost in that incident. Thankfully, they were able to deal with it well and recovery occurred.
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So, what does this insurance do in order to keep your funds safe? They classify the banks into different categories based on how much they’re making. If they hit less than 2% risk capital ratio, which is when they are “critically undercapitalized,” the FDIC comes in and takes things over.
At that point, they redistribute the savings in the bank. They either sell the accounts to healthy banks, or they pay out what consumers are owed and liquidate the bank. Either way, the FDIC is protecting consumers and eliminating banks that may otherwise harm the economy.