Do I Really Need Deposit Insurance?

Deposit insurance, which is provided in the United States by the FDIC, covers any deposits you make at an FDIC insured bank. Types of accounts covered by deposit insurance can include checking and savings, money market accounts, NOW accounts or certificates of deposit. This type of insurance was created in the 1930s as a response to the massive bank failures of the Great Depression. Since the FDIC’s inception in 1933, there has not been a single penny lost in insured deposits in the United States.

Critics of the federal deposit insurance policy claim that deposit insurance can be dangerous to free market economics. Some critics fear that insuring all the deposits at a bank actually encourages risk-taking behavior on the part of the bank, since deposits will be covered by the federal government in case of a bank failure. Critics also argue that having a regulatory agency in charge of protecting consumers’ deposits also encourages depositors to neglect their own deposits and stop paying attention to the market. They believe that the lack of personal responsibility inherent in the concept of federal regulation poses a “moral hazard” to the consumer.

One might argue about the ideological desirability of having a regulatory agency overseeing the safety of depositor’s accounts. In reality, however, this line of reasoning is analogous to the argument that taking out a life insurance policy might encourage people to start smoking and jump out of airplanes. Historically, banks have not been made more stable due to a lack of regulation. Also, the FDIC ensures that its member organizations meet rigorous standards for financial strength and stability. FDIC-insured financial institutions are reviewed regularly to ensure that their operations continue to meet these high standards. An FDIC insured bank, in other words, is consistently examined to make sure it is not indulging in risky investments that would eventually fall upon the FDIC.

Even so, banks do fail and if you find yourself in a situation with a failed bank, your deposit insurance will come in handy. FDIC insurance covers all deposits up to the minimum insured amount limit, dollar for dollar, including interest and principal.