What is deposit insurance?

In order for deposits to confidently entrust the bank with its money, if there is any guarantee that no matter what it can happen, it will be able to raise money back. Deposit insurance is a primary way to guarantee the security of the depositor. This is important because of the very true risk of bank failure. Dozens and even hundreds of banks fail every year or become financially insolvent. In the United States, the money of deposits is insured by the federal company insurance (FDIC). This money comes from depositors 'accounts and in most cases banks maintain only a small percentage of their customers' money as cash. This practice, known as fractional reserve banking, is very common around the world and is considered completely ethical.

The danger lies in the fact that if the banks' customers feel that their bank has some kind of financial problems, due to the failure of borrowers for loans or unexpected problems is their incentive to get their money out even if it still moou. When all of the bank deposits do it at once, it is said that there is a run in the bank. Because the bank only holds a fraction of the total resources on the reserve, not everyone will be able to raise their money. Those who can get it, do it, and without any cash remaining at hand, the bank usually has no choice but to switch from business.

At least that's how things went before insurance. As a result of extensive banks of banks in the 1930s. Soon afterwards many other countries followed. Deposits of cooperative credit unions have also been insured since 1970. As in the case of most of the earth, insurance deposits in the US is government. Banks pay how much for FDIC premiums who enter if the bank fails and provides the bank deposits a way to raise their money. If it must be done, it is usually a very proper process, different from running on the bank.

deposit insurance as important, notUnlimited. In most cases, there is a government limit to the amount of funds that can be guaranteed that someone will return if the bank fails. This does not exclude anyone to have accounts on multiple banks as preventive measures, and in fact most of the wealthy individuals do this only as part of a common strategy known as diversification.