Federal Deposit Insurance Corporation (FDIC)

Banks are, despite the recent failures of large banks, still considered bastions of great safety in modern society. There even exists the saying “Like money in the bank”, which highlights security and reliability. Yet, things were not always so secure. Without a doubt, bank failures can be devastating to a family’s financial well-being. One can only imagine the fear that would overcome an individual when they learned that their hard-earned money were at risk of being wiped away in mere minutes. Thankfully though, there exists the Federal Deposit Insurance Corporation (FDIC).
In 1933, during the throes of the Great Depression, the FDIC was brought into existence by The Banking Act of 1933, better known as the Glass-Steagall Act. The …show more content…
In the case of FDIC insurance, this entails that a depositor loses vigilance. The depositor, less concerned for the safety of his or her money, focuses less on the risk that the bank at which they do business is involved with. In turn, the banks feel less pressure to perform at a less risky level. This effectively erodes the effectiveness and efficiency of a banking system, especially where safety and security are concerned. Without the threat of depositors withdrawing their money and destabilizing a bank, banks feel much less responsibility. In effect, this is what the issue of moral hazard boils down to: responsibility. When a third party becomes involved in a business transaction between two parties, the responsibility for each party’s side of the transaction can be eroded. On one hand, customers do not need to be responsible with their money and research banks—their money is insured! On the other hand, with the slackened pressure to perform well, banks feel less responsible to depositors for potential losses on risky business. There are three pieces of evidence that demonstrate the extent to which the FDIC has insured depositors, evidence that perhaps holds implications for the …show more content…
As a whole, the amount of insured deposits has never reached near to 100% the amount of total deposits; however, from the inception of the program, the amount of insured deposits has increased relative to the total of deposits. This percentage is a direct result of the second piece of evidence—which will be addressed shortly—that deals with the maximum nominal and real amount of money insured by the FDIC. While the coverage percentage has only been has high as about 80%, this is a drastic step up from previous levels, especially from the 45% that was initially covered by the program. It is somewhat impossible to tell the exact effects of such increases in coverage, but if we follow the principle of moral hazard we can technically view the robbing of responsibility from the depositor. The implications of such a process could lead to irresponsible risk-taking by banks. In fact, perhaps we have already seen the beginnings of such irresponsibility with the most recent financial

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