The role of deposit insurance is important in banking industry and is also essential for smooth operation of the entire financial system. Even during uncertain times, deposit insurance provides safety by creating deposit confidence for small depositors. With respect to the soundness of the financial system, deposit insurance helps to prevent bank panics even in the midst of bank failures by insuring deposit accounts up to $100,000. This valuable service can also prevent a liquidity crisis and help limit the downside of economic cycles. The Federal Deposit Insurance Corporation which provides deposit insurance to all banks and thrifts is also responsible for resolving banking problems quickly and efficiently. Although deposit insurance has helped reduce bank panics since the emergence of the FDIC in 1933, the current system is far from perfect and may be in need of reform to continue to provide public confidence in the banking industry. Flaws in the current system that have been pointed out many economists and the FDIC include a lack of risked based pricing, multiple insurance funds, untimely premium adjustments, and poor inflation indexing.
The FDIC was created in 1933 with the passing of the Banking Act, 1933 in an effort to reduce bank runs brought about by the great depression and restore public confidence in the financial system to get the economy back on its feet. The FDIC's creation and current operations are based on the regulatory goals of promoting safety and soundness in the banking industry. FDIC coverage is extended to all banks that are part of the Federal Reserve System. State banks and community banks that are not members of the Federal Reserve System also have the option of purchasing FDIC coverage. Deposit insurance provides panic prevention by insuring deposit accounts up to a certain level. The ceilings were originally set at $2,500 in 1934 and have risen all the way up to $100,000 in 1980.
