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Definition of Federal Deposit Insurance Corporation - Research Paper Example

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This paper discusses the definition of the Federal Deposit Insurance Corporation. It offers deposit insurance that assures the security of deposits in affiliate banks. It also assesses and supervises financial organizations for security and reliability…
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Definition of Federal Deposit Insurance Corporation According to Cole (2009), Federal Deposit Insurance Corporation (FDIC) is a U.S. government institution instigated by the Glass-Steagall Act in 1933. It offers deposit insurance that assures the security of deposits in affiliate banks. It also assesses and supervises financial organizations for security and reliability. It also embarks on consumer-protection roles, and administers financial institutions in receivership. Insured institutions are required to put indicators at their business premises declaring that their deposits are supported by the full trust and credit of the U.S. Government. Since the institution of FDIC insurance in January 1934, no client has lost any deposited funds as a result of malfunction. This paper delves into the history of FDIC, its administration, operations, functions and effectiveness. It also looks into its performance over the years, whether or not it is regulated by laws and whether or not it is still a preferable insurance institution. My proposition with regard to FDIC is that has fulfilled its goals and revitalized many malfunctioned banks. Board of Directors This is the administrative body of the FDIC. It comprises of five members, three nominated by the U.S. president with the conformity of the U.S. Senate and two non-executive members. The three nominated by the president have six years of service. Only two representatives of the board may be of similar political inclination. The president, with the permission of the Senate, also selects one of the chosen representatives as chairperson of the board for five-year of service. In addition, another of the members is designated as vice chairperson of the board for a five-year term. History In the 1930s, the U.S. and many other countries around the world went through a harsh economic recession that is referred to as the Great Depression. At the peak of the depression, the unemployment rate was a quarter and the stock market had reduced by three quarters since 1929. Bank runs were regular since there was security on clients’ money in the banks. This is because banks just stored a percentage of deposits, and clients were at jeopardy of losing their cash that they had entrusted to the banks. In 1933, President Franklin Roosevelt approved the Banking Act. FDIC made was a temporary state institution. It was given the mandate to offer deposit insurance to financial corporations. It was also given the power to control and administer government non-member banks. FDIC was provided with preliminary loans 289 million dollar via the U.S. treasury and the Federal Reserve (Henriques, 2008). For the first time, federal supervision was extended to cover all money-making banks. Moreover, according to the (Glass-Steagall Act), these commercial banks were detached from investment banks. They were also hindered from reimbursing interest on checking account. Furthermore under this Act, state banks were permitted to have branches countrywide with the consent of state law. How FDIC Operates The FDIC’s workforce is approximately eight thousand people all over the country (Cole, 2009). The head offices are in Washington, D.C. Regional ones are found in Atlanta, Boston, Chicago, Dallas, Kansas City, Memphis, New York City, and San Francisco. Moreover, field supervisors, whose responsibility is to carry out on-site scrutiny of banks, have ground offices in eighty more places throughout the nation. FDIC aims at safeguarding clients who keep their cash in banks against malfunction of banks. These consumer persons include all individuals who put their funds in banks without putting into consideration whether he or she is a U.S. national or a resident. It also oversees all financial institutions that are affiliates of the Federal Reserve System (FRS). Additionally, it has the mandate to manage some banks that are not associated with FRS. It is also the responsibility of the FDIC to scrutinize and control the banking industry. This entails enabling banks to carry out their operations safely and lawfully and to avert bank letdowns while fostering healthy rivalry in the industry. When a bank collapses as a result of not having adequate assets, the FDIC utilizes its funds to compensate the bank's clients. It then sells the bank’s property and uses the returns to support other banks when they fail. The FDIC indemnifies deposits that are paid to the U.S. government. Deposits, which are allocated abroad, do not get FDIC’s coverage. Assets like shares or joint funds are not insured by FDIC. Money in accounts and other negotiable documents is insured. The FDIC establishes lawful ownership of bank savings by evaluating the financial institution’s records. Assuming those records are equivocal, the FDIC insurance extends to the person entity mentioned in the existing records. The FDIC has authority over financial institutions in the fifty states, the District of Columbia, Guam, Puerto Rico, and the Virgin Islands. It adjusts banks’ operations by making rules obligatory, for instance, the Equal Credit Opportunity Act that hinders some forms of prejudice in lending, and scrutinizes banks to ensure that they are carrying out their activities lucratively and lawfully. Banks that are covered by the FDIC give an evaluation quarterly to the FDIC. The money paid for evaluation by the bank relies partly upon the amount of cash kept in the bank. Certain states have community property legislation, meaning that the assets owned by one spouse are lawfully and equally the other spouse’s. Nonetheless, community assets laws do not influence the coverage provided by the FDIC. In some states which uphold these community laws, an account singularly belonging to one spouse is not regarded by the FDIC as also owned by the other spouse. Accounts recorded as belonging to both spouses are protected by the FDIC as joint accounts. FDIC’s Performance There have been innumerable financial calamities over the years. For instance, the financial slump that occurred in 2008 left twenty-five banks in the U.S. bankrupt. These carried to the FDIC. During that same year, the greatest bank collapse in dollar value was recorded in September 2008. In 2009, the FDIC instituted its Legacy Loans Program (LLP). This program intended to assist financial institutions get rid hazardous assets from their balance sheets to ensure that they increase new funds and promote lending. In the same year, the FDIC raised the number of ill performing banks to four hundred and sixteen in the second quarter, and this number continued to increase in the consecutive quarters. By the end of 2009, one hundred and forty banks had become bankrupt. In 2010, FDIC chairperson Sheila Bair notified that the failures in 2010 could exceed the one hundred and forty banks that were usurped in 2009. The real estate business overexposure was considered the most grievous risk to banks. With the evident progressive risks threatening the banking industry, the sufficiency of FDIC's financial support system is questionable. FDIC’s insurance, in addition, is guaranteed by the Federal government. As indicated in the FDIC government website (as of January 2009), "FDIC deposit insurance is backed by the full faith and credit of the United States government". This articulates that the assets of the U.S. government are entrusted to FDIC-covered clients. However, the legislative basis for this assertion is ambiguous. This is because there appears to be no stringent legislation binding the state to compensate any insurance liabilities not covered by the FDIC. FDIC’s Coverage FDIC categorizes banks in five distinct groups with regard to their risk-based capital ratio. Member banks must follow the requirements of closing a business and pay debts to get the benefits. When a bank underfunded the FDIC issues a notification to the bank. When it falls below six percent the FDIC can change administration and compels the bank to undertake remedial action. When the commercial institution is severely underfunded the FDIC declares it bankrupt and takes over the administration of the financial institution. FDIC utilizes two methods in situations of bankruptcy. These are firstly, Purchase and Assumption Method (P&A) and secondly, Payout Method. For the latter, funds are covered by the FDIC which tries to recover its compensations by selling the property of the malfunctioned bank. These are straight fund payoffs and are only undertaken by the FDIC does not get a bid for a P&A deal and for a covered fund transfer deal. In immediate fund payoffs, no liabilities are ignored and no property is bought by another organization. In addition, the FDIC decides the covered amount for each client and pays that value to him or her. In determining each client’s summation fund amount, the FDIC puts together all interest earned up to the present date of malfunction under the agreed terms of the client’s account. For the former method (P&A), total deposits are managed by an open financial institution which also buys some of the failed commercial organization’s bank. Other failed assets are sold online, mainly through The Debt Exchange and First Financial Network (Sicilia & Cruikshank, 2009). FDIC covers a number of products namely: present operating accounts, savings accounts, fixed accounts and other negotiable documents. Accounts in various financial institutions are protected independently. All sub branches of a commercial organization are put together to come up with a single bank. In addition, an online commercial institution that is a branch of the financial institution is not referred as to an independent one. This is even if the indentifying name is different. However, FDIC also considers and protects people who are not U.S. nationals. The FDIC prints out a guide that puts forth the main properties of FDIC coverage and looks into universal questions posed by financial organization’s clients about deposit coverage. However, there some entities that the FDIC does not cover even if they are bought through an insured commercial institution. They include shares, bonds, joint funds and cash funds (Bagger-Sjoback, 2009). Investment supported by the U.S. treasury, are also among these entities. Moreover, constituents of security deposit boxes are not covered. This is even if they bear the name ‘deposit’ they are not deposit accounts and are only protective stores that are hired by a customer or an organization. Losses brought about by corruption and burglaries at an institution are also not covered. Such conditions are usually protected by special insurance legislations that financial organizations purchase from non-governmental companies. Furthermore, accounting mistakes are not insured. In such conditions, there are corrective measures for customers under the government’s contract law and certain federal legislations with regard to the type of financial deal. Finally, insurance and pension products which include life, automobile and mortgage insurance are also not insured (Bengston, 1998). Conclusion FDIC was started by the approval of President Franklin Delano Roosevelt and Congress, to assure the security and protection of commercial organization’s deposits and revitalize the public's faith in the banking system. As evidenced in the preceding debate, FDIC has somehow succeeded in fulfilling its predetermined mandate. It is explicit that with the absence of FDIC, many financial institutions would have slumped, especially, minority banks during the harsh economic conditions. Consequently, many banks have sought the assistance of FDIC and survived. This essay affirms my proposition proclaimed in the beginning. Bibliography Bagger-Sjoback, R. (2009). FDIC’s Shrinking Deposit Insurance Fund-Atestimony of Current Accounting Standards. Saxo Bank Research. Bengston, C. (1998). The Life Cycle of the Firm: Pension Management Incentive within the PBGC Structure. University of Nebraska. Cole, D. (2009). Current Literature on FDIC. USA: ProQuest LLC Henriques, D. (2008). Treasury to Guarantee Money Market Funds. The New York Times. Sicilia, D. & Cruikshank, L. (2000). The Greenspan Effect. New York: McGraw-Hill. West's Encyclopedia of American Law. (1998). West Group. Read More
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