How does the FDIC stand behind the banking accounts and guarantee the funds to b

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  1. LAURENS WRIGHT profile image65
    LAURENS WRIGHTposted 4 years ago

    How does the FDIC stand behind the banking accounts and guarantee the funds to be repaid.

    For every certified banking account, the FDIC says that they back the funds in that account a certain amount.  If the bank creates the money to loan out, how can the Feds or banks back the accounts?  How long does the banks and Feds have to pay this guaranteed account amount back to the depositor?

  2. tehgyb profile image81
    tehgybposted 4 years ago

    Its insurance, it works the same way your car insurance company stands behind your car when someone rear-ends you.
    The banks pay a monthly premium. In the event they are robbed or a computer glitch causes money to go missing, they file a claim and the money is replaced.

    As an addition: The banks don't actually create the money, in any sense. They're lending out the money they hold. Basically the money you put into the bank isn't actually kept in the bank, its loaned out at an interest rate. In a sense when you put money in the bank you're lending your money to that bank, for them to lend and make more money on. In return you get a small interest rate that the bank pays you every year for lending them your money.

    1. LandmarkWealth profile image78
      LandmarkWealthposted 4 years agoin reply to this

      Banks do not lend out deposits. Loans create deposits.  It's called fractional reserve banking.  It is illegal for banks to lend out reserves.  All reserves must be held at the Federal Reserve and dictate a multiple of credit expansion in M2

  3. LandmarkWealth profile image78
    LandmarkWealthposted 4 years ago

    The purpose of the FDIC coverage is to prevent a run on a financial institution which can trigger instability in the system.  This is a controversial topic, because many believe the high level of guarantee prevents account holders from properly researching the activities of the banks they choose to do business with due to assumed safeguards, which may increase speculative activity among financial institutions.

    In regard to the prior comments, just to clear something up.  Banks do not lend out deposits.  Banks create deposits via lending.  It actually happens in reverse.  It is a common misunderstanding about how the banking system works.  Bank cannot and do not lend out their reserves.  They hold all reserves on demand with the Fed.  Those reserves are part of what is called base money, and dictates a multiple of credit creation for lending.  They then create money as credit out of thin air and lend it for things like a car or home loan.  That money ultimately ends up back in the banking system somewhere as a deposit.  If it is converted to physical cash, then the aggregate reserves in the banking system must go up, and the banks borrow more from the Fed.  This is why the money supply expands and contracts during economic expansions and contractions.  Each time a loan is paid off, M2 money contracts.  Every time more money is borrowed M2 expands.   But banks do not loan out deposits, they are in fact creating deposits with the loan.     Nearly all the money created in the banking system that exists in our accounts is bank credit.  Gov't created currency exists in only two places.  Reserve deposits held had the Federal Reserve Bank by private banks, and deposits converted into physical currency.  A better explanation of how the fractional reserves system works can be seen here.   

    http://www.standardandpoors.com/spf/upl … _14_13.pdf

 
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