Faith in Banks

The Federal Deposit Insurance Corporation (FDIC) was created in 1933 as a depression-era effort to restore the public’s faith in banks and banking. The early years of the depression were marked by numerous bank failures and runs on even healthy banks. After taking office President Roosevelt declared a bank holiday to give regulators a chance to identify, close/merge/sell troubled banks and to stop a spiraling panic of depositors hearing about bank failures and running to their own bank to withdraw funds.

In my Principles of Macroeconomics class we have just been talking about money (in particular fiat money) and the importance of trust. As long as economic players trust that money will be valued by others we use it. The same kind of trust is important in banking. Our economy needs banks in order to attract deposits, which then allow borrowers to secure loans and invest or consume.

The FDIC is a type of insurance program for banks. Each bank is required to pay premiums to the FDIC. If that bank fails, then the bank’s depositors are protected and will get up to $250,000 from the FDIC. This protection made wary depositors in 1933 start returning their money to the banks, which in turn helped fuel the recovery.

nprlogo_138x46On NPR’s Morning Edition this morning, there was an interesting piece about workers hired by the FDIC in 2009 to help with the process of closing failed banks, securing the deposits and paying the depositors, and then selling the remaining assets of the bank. As of now there isn’t a transcript of the piece, but you can listen to it here.

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