Types of Insurence Offered by Banking Institutions
The United States of America is one of the first countries to introduce bank deposit insurance. The need for such a system appeared due to the global economic crisis of the 1930s, better known in the United States as the Great Depression. The exact date for the emergence of such a deposit insurance system is June 16, 1933 – the day the banking law was signed, known as the Glass-Steagall Act (GSA).
The signing of this legislative act was dictated by the need to restore investor confidence in banks: more than 1/3 of banks in the United States went bankrupt by the time the law was signed. A common occurrence during that period was “bank run”. It means a large number of depositions was withdrawn. It resulted in the bankruptcy, even if the latter could successfully continue its activities in ordinary circumstances.
The main provisions of this law included a ban on investment activities for banks, separation of banks and investment companies, the inclusion of new groups of banks in the US Federal Reserve System and compulsory insurance of bank deposits in the amount of up to $2,500. A year later, the amount of insurance compensation was doubled, up to $ 5,000. Over time, the amount of insurance compensation gradually increased and from 2008 to the present moment it amounts to $ 250,000.
The amount of insurance compensation applies to various types of deposits and is recorded separately in each bank in which the depositor has placed his funds. Certain deposits fall under certain categories, which are owned by several individuals (up to 250,000 US dollars for each deposit holder are refundable) and deposits that are paid upon the death of the owner to the indicated persons (up to 250,000 US dollars are insured for each indicated recipient). Some types of pension savings are also covered by the same amount.
The Federal Deposit Insurance Agency (FDIC), which was created in 1933 in connection with the adoption of the Glass-Steagall Act, is responsible for the payment of insurance claims. When an insured event occurs, two methods of compensation are practiced:
- reorganization of a bankrupt bank by absorption by another bank and acceptance by it of all obligations of a bankrupt bank.
- the Federal Deposit Insurance Agency independently pays funds in insured accounts.
To pay insurance compensation, the FDIC may request a loan from the US Department of the Treasury in the amount of up to $500 billion.
Not subject to insurance are:
- mutual investment fund;
- government securities;
- municipal securities;
- US Treasury securities;
- funds in safety deposit boxes.