Any student of securities laws knows that the Federal Deposit Insurance Corporation plays an important role in safeguarding the integrity of our financial markets.  I’m very interested in the FDIC and I’m surprised there aren’t more histories written about it.  Here is my brief summary of what is out there so far.

The Federal Deposit Insurance Corporation: Its History, Authority, and Practical Application

Introduction

The Federal Deposit Insurance Corporation (“FDIC”) has been credited with helping consumer confidence in the banking sector by insuring bank deposits “backed by the full faith and credit of the U.S. government.”[1] Most U.S. citizens do not even consider bank failure when they put their money in the financial services sector—even though just two short generations ago bank runs were commonplace. Part of the reason for this is that, since the creation of the FDIC, no banking customer “has ever lost a penny of insured deposits.”[2] The FDIC has been a powerful force in banking regulation that has served to secure our financial system.

This paper gives a broad overview of this important government entity. Section I describes the history and evolution of the FDIC, up to and including the recent financial crisis in 2008. Part II of the article describes the current authority of the FDIC, using historical examples of this authority. Part III gives practical ways that the FDIC works along with suggestions on how a person or business entity can maximize their insured deposits.

I: The History of Deposit Insurance in the United States

In its seven decades, the FDIC has weathered significant changes in the U.S. financial climate. At each stage, Congress has acted to support its effectiveness with new legislation. As a result, the FDIC is an extremely robust institution, able to perform its role in a wide variety of circumstances.

  1. The Great Depression and the Emergency Banking Act of 1933

After the stock market crash in autumn of 1929 to the end of 1933 nearly 9,000 banks suspended operations, resulting in losses to depositors of $1.3 billion.[3] Nearly 4,000 banks closed from January to March of 1933 alone.[4]

The financial situation, and, just as importantly, the public’s pessimistic outlook regarding the financial sector was so catastrophic that President Franklin Delano Roosevelt, on the first business day of his presidential tenure, issued a “bank holiday” which suspended all banking transactions for almost an entire week.[5] The Presidential proclamation specified that “no such banking institution or branch shall pay out, export, earmark, or permit the withdrawal or transfer in any manner or by any device whatsoever of any gold or silver coin or bullion or currency or take any other action which might facilitate the hoarding thereof; nor shall any such banking institution or branch pay out deposits, make loans or discounts, deal in foreign exchange, transfer credits from the United States to any place abroad, or transact any other banking business whatsoever.”[6]

Roosevelt administration officials quickly drafted legislation to legalize the bank holiday and resolve the banking crisis.[7] Early in their deliberations, and also at the suggestion of former President Hoover in a handwritten ten page letter to Roosevelt addressing the banking crisis, it was clear that public perception of stability was critical—prompting the need for sweeping banking legislation.[8]

In an extraordinary session of Congress, Henry Steagall, Chairman of the Committee on Banking and Currency, purportedly had only one copy of the bill in the House.[9] Waving the copy over his head, Steagall had entered the House chamber, shouting, “Here’s the bill. Let’s pass it.”[10] After only 40 minutes of debate, during which time no amendments were permitted, the House passed the bill known as the Emergency Banking Act, which stabilized the banking industry enough to reopen the banks on March 13, 1933.[11]

 

  1. The Banking Act of 1933

Approximately three months later after considerable debate on the topic, Congress passed the Banking Act of 1933[12] and created the Federal Deposit Insurance Corporation (the “FDIC”).[13]

The Banking Act of 1933, including certain provisions that became known as the Glass-Steagall Act, erected a wall of separation between commercial and investment banking which restricted commercial banks from engaging in securities activities and prohibited investment banks “from engaging in the banking business.”[14] But as one leading bank regulatory scholar noted, the limitations of the Glass-Steagall provisions “have been progressively eroded by administrative interpretation and court decisions.”[15]

The creation of the FDIC and the expansion of the deposit insurance was quite controversial in Congress. In spite of their personal opinions regarding its effectiveness, it is likely that key members of Congress simply yielded to public opinion. As one business journal during the period reported,

It became perfectly apparent that the voters wanted the guarantee [deposit insurance], and that no bill which did not contain such a provision would be satisfactory either to Congress or to the public. Washington does not remember any issue on which the sentiment of the country has been so undivided or so emphatically expressed as upon this.[16]

Some historians point out that the Federal Reserve System did very little to ease the actual liquidity problems of the banks prior to June 1933 because most failed banks were nonmembers for which the Federal Reserve felt no responsibility.[17]

The dramatic and intentionally public changes taken by the newly-elected President Roosevelt served to ease the tensions of the American public and inspire confidence. After more than a month of bank runs where many Americans were withdrawing their cash from local banks and hoarding cash at their homes, President Roosevelt held a “fireside chat” broadcast via radio on Sunday evening, March 12 where he informed the public that only sound banks would be licensed to reopen by the U.S. Treasury.[18] He said, famously, “I can assure you that it is safer to keep your money in a reopened bank than under the mattress.”[19] Most historians agree that the American public indeed believed this claim.[20]

  1. Origins of Deposit Insurance

Deposit insurance was not a novel concept. Before the creation of the FDIC, deposit insurance had a record of experiments at the state level extending back to 1829.[21] New York was the first of fourteen states that adopted plans, over a period from 1829 to 1917, to insure or guarantee bank deposits or other obligations that served as currency.[22] The purposes of the various state insurance plans were to protect bank notes and deposits in state chartered banks.[23] These state insurance plans eventually proved insufficient for various reasons with the last state deposit insurance program ceasing in 1930.[24]

Between 1886 and 1933 there were 150 proposals for federal deposit insurance or federal guaranty presented to Congress.[25] Typically these proposals were in response to a financial crisis and had varying degrees of efficiency.[26] None of these proposals provided a sustainable solution until Congress passed the Banking Act of 1933.

During the Great Depression banks were subjected to frequent runs on deposits by customers, which often put too much strain on banks, causing them to fail. The FDIC addressed this problem by insuring the deposits of national banks and state-member banks with federal government funds.[27] Such deposits were, and remain today, “backed by the Full Faith and Credit of the United States Government.”[28] In spite of being insolvent in the early 1990s,[29] “[i]n the FDIC’s history, no customer has ever lost a single penny of insured deposits.”[30] Additionally, in the seven decades since the creation of the FDIC, the banking and financial services industry has enjoyed relatively few bank runs or widespread bank collapses.[31]

As one author has written,

“Congress created the Federal Deposit Insurance Corporation (FDIC) in order to stem the massive disintermediation caused by a cascade of bank failures in the early 1930s. Panics were pervasive and bank runs were proliferating. Deposit insurance was designed to make bank deposits as safe as government bonds in order to stem bank runs and protect communities from the economic shock of bank failures. The aim was to restore depositor confidence to prevent the withdrawal of funds from the banking system.”[32]

  1. Federal Deposit Insurance Fund

The Banking Act of 1933 authorized the FDIC to pay depositors in insured banks that failed through a Deposit Insurance National Bank (“DINB”) managed by the FDIC with funds contributed by the Treasury and the Federal Reserve. Through 1935 the DINB paid depositors directly until Congress expanded the FDIC’s powers. The Deposit Insurance Fund had a balance of $553.5 million, or a ratio of the fund to insured deposits of 1.96 percent—the highest reserve ratio in the history of the FDIC.[33] Because of large-scale financing of the federal government during World War II, total bank assets doubled between 1941 and 1945, causing the fund to expand and grow to over $1 billion by year-end 1946. [34]   AT this point, bank failures were scarce and there was a sentiment in Congress that more banks should have been allowed to fail more often,[35] this sentiment resulted in Congress mandating that the FDIC return the original capital contributed by the Treasury and the Federal Reserve.[36]

In 1950, federal deposit insurance was made mandatory for national commercial banks.[37] By 1950 the Fund had reached $1.2 billion, causing Congress to pass the Federal Deposit Insurance Act of 1950 which lowered the ratio of Insurance Fund to insured deposits from 8.3 cents per $100 of assessable deposits to 3.7 cents per $100.[38] This easing of the Insurance Fund was the result of the following exchange between FDIC Chairman Maple T. Harl and Senator Paul Douglas of Illinois during the 1950 Act hearings:

“Senator Douglas: …Mr. Harl… [on your prepared statement] you speak of making final payment to the Treasury…for the full loans advanced…would that include the interest upon the Government loan which was made?

Mr. Harl: It did not. The law provided that there should be no dividend upon the capital stock.

Senator Douglas: In practice, the Government has made an advance to the FDIC which has not been repaid; namely, the interest on the bonds which the Government issued, but for which it was not reimbursed.

Mr. Harl: If we have an obligation we are ready to pay it.

Senator Douglas: That is a possible source of revenue that I had not thought of. This brief conversation, which I at first thought was going to be unprofitable, might yield the Government as much as $40 million… It may turn out there was gold in ‘them there hills.’”[39]

The $40 million estimated by Senator Douglas was low, during 1950 and 1951, the FDIC paid approximately $81 million to the Treasury for the interest foregone on the initial contribution of both the Treasury and the Federal Reserve Banks.[40]

The Banking environment started to shift dramatically in the 1970s and 1980s as a result of the globalization of financial markets and the increased competition for financial services. This environment resulted in record insured-bank failures, record Deposit Insurance Fund losses, and even caused the Savings and Loan Insurance Corporation (“SLIC”) to fail and become acquired by the FDIC.[41]

At the close of 1991 and 1992, the Deposit Insurance Fund[42] had a negative balance of $7 billion and $101 million respectively.[43] For the first time since its founding, the FDIC was insolvent.[44] Congress merged the Bank Insurance Fund and the Savings Association Insurance Fund into a new fund, the Deposit Insurance Fund, on March 31, 2006.[45]

Historians believe that key economic variables responsible for this shift were: (1) foreign exchange-rate volatility; (2) interest-rate volatility; and (3) poor economic conditions.[46] Foreign exchange-rate volatility stemmed from the increased international trade in the post-WWII era. The 1970s, as now, were interspersed with periods of relative calm and substantial volatility. Interest-rate volatility occurred because of the oil embargoes which caused substantial inflation.[47] Economic factors were caused by a combination of events such as the oil embargoes of the 1970s, wars, dissolution of the Soviet Union, and record inflation in the late 1970s.[48]

In addition to these economic variables, there were also a surge of newly issued commercial bank charters which increased the insured institutions.[49] New and risky financial products emerged, such as asset-backed securities. Historians and economists illustrating the increased risks in the banking sector in the 1970s and 1980s point to securitization. In 1971 the proportion of consumer mortgages which had been securitized was about 8 percent. By 1991 more than 40 percent of the consumer mortgages were securitized—possibly contributing to the economic crisis of 1990-1991 when the Federal Deposit Insurance Fund went insolvent.[50] From 1991 to 1998 the U.S. economy began an unprecedented expansion causing the banking industry to roar back to life. In 1991, one of every nine banks was unprofitable, but by 1997 that figure had fallen to less than one in twenty.[51]

In the 1950 Act, Congress authorized the FDIC to declare a bank “too big to fail” when the FDIC determined, at it’s own discretion, that a failing institution was so large that its failure could result in a systemic risk to the banking system by undermining public confidence.[52] This authority was revised in 1991 when Congress passed the Federal Deposit Insurance Corporation Improvement Act (“FDCIA”), requiring that a “too big to fail” determination needed to be agreed upon by the FDIC Board, the Board of Governors of the Federal Reserve System and the Secretary of the Treasury, in consultation with the President.[53]

The “too big to fail” determination had never been used until 2008 when this group declared many large institutions “too big to fail,” extending to such institutions numerous liquidity facilities as well as providing capital via the Troubled Asset Relief Program (“TARP”).[54] The FDIC found itself in a position where it could not provide relief to the many failing financial institutions because the large number of bank failures exhausted the Deposit Insurance Fund. Furthermore, prior to 2008 Congress declared the FDIC “overfunded” and had them stop collecting insurance premiums from “well-capitalized” banks.[55] The Deposit Insurance Fund fell into the negative in 2009 and Congress, in response, established a minimum designated reserve ratio equal to 1.35% of insured deposits.[56]

II: Authority of the FDIC

  1. The FDIC Within the Federal Regulatory Scheme

National commercial banks are heavily regulated by a number of government organizations, requiring financial institutions obtain a fairly onerous charter from either a state or the federal government as well as subject themselves to federal agency oversight.[57] Three main agencies regulate commercial banks: (1) the Office of the Comptroller of the Currency (“OCC”); (2) the Federal Reserve Board (the “Fed”); and (3) the FDIC. The OCC regulates banks chartered by the federal government, the Fed regulates members of the Federal Reserve System, and the FDIC supervises and monitors all remaining state non-member banks.[58]

  1. Powers of the FDIC

The Banking Act of 1933 established the FDIC as a temporary government corporation (which was later made permanent) and provided the regulatory framework for the FDIC. The 1933 Act (1) gave the FDIC authority to provide deposit insurance to banks, (2) authorized the FDIC to regulate and supervise state nonmember banks, and (3) extended federal oversight to all commercial banks, and allowed national banks to banks intra-state (as long as there were no state law prohibitions).[59] In addition, Congress provided the FDIC with two very broad powers: (1) the power to monitor and examine financial institutions;[60] and (2) the ability to rapidly close down and take over insolvent institutions in order to mitigate losses to the federal deposit insurance pool.[61]

  1. The Power to Monitor and Examine Financial Institutions

The FDIC performs on-site and off-site examinations of financial institutions. There are four main types of bank examinations:[62] (1) examinations which review the bank’s trust department to determine whether it is being compliant; (2) examinations which investigate consumer-related compliance, such as truth-in-lending, civil rights, and community reinvestment; (3) examinations which focus on the bank’s electronic data processing systems; and (4) a safety-and-soundness examinations which focus on capital adequacy, asset quality, management, earnings, and liquidity.[63]

All banks received an annual examination until the mid-1970s when this annual audit was discontinued as an “archaic” and “outdated” practice.[64] As regulators and banks developed more and more sophisticated computer software, the FDIC began to shift towards off-site examinations, claiming that monitoring software replaced the need to do annual on-site examinations.[65] Consequently, by 1986, 1,814 commercial banks subject to FDIC supervision had not been examined in three years.[66]

In 1995, the FDIC’s Chairman Ricki Helfer ordered her staff to conduct an investigation and analysis of the banking crisis which resulted in the publication of a book which found that the effects of the banking crisis would have been substantially mitigated by adequate on-site supervision by banking regulators.[67]

The past 30 years have been marked by deregulation within the FDIC, and the current organization does not have the same monitoring presence it did in the mid-1970s. In spite of an increase in insured bank assets from $589 million to $805 million, the FDIC reduced its staffing levels by 19 percent from 1979-1984 through hiring freezes and other staff reduction methods.[68] In 1991, when the FDICIA was enacted, Congress essentially guaranteed extensions of the examination periods from twelve months to eighteen months for institutions with a tier 1 status and less than $100 million in assets.[69]

In 2005, further deregulation occurred. Many critics of regulation pointed to the strength of the financial services sector and also pointed their fingers at the more than eight hundred recent banking regulations enacted by federal agencies[70] and the fact that bank regulatory compliance accounts for 12-13% of the banking industry’s operating expenses.[71] This eventually led to the Financial Services Regulatory Relief Act of 2006, which extended the twelve-month examination period to eighteen-months for institutions with tier 2 status and less than $500 million in assets.[72]

A looming challenge with these examinations is the pending human resources crisis facing the FDIC.[73] When the FDIC increased staffing in the 1980s the agency tripled in size in just four years followed by a hiring freeze in the 1990s—leaving the FDIC staffed by workers of a homogenous age.[74]

  1. The Ability to Take Over Insolvent Institutions

 Congress originally authorized $2,500 of deposit insurance per depositor.[75] Congress has increased this limit seven times with the current deposit insurance coverage amount being $250,000 per depositor.[76] In order to minimize the usurpation of funds in the Deposit Insurance Fund, the FDIC has the authority, largely at their own discretion, to seize the assets of a troubled bank. The purpose of this authority is to prevent the troubled bank from liquidating assets and costing the fund more than it otherwise would have (particularly since many failing banks have fraud issues or poor management).

The take-over process is typically the same in every case. The FDIC rapidly closes down and takes over insolvent institutions, usually on a weekend.[77] The FDIC will stop the collapsed institution’s operations on Friday, spend the weekend arranging the sale of the institution’s deposits and loans to a solvent competitor and then assisting the buyer to open doors on Monday morning with as little disruption as possible.[78]

During the first seven years of the FDIC’s operation, the FDIC handled an average of fifty failures annually (mainly dealing with the fallout from the Great Depression).[79] Over the next three decades, bank failures became much less common, averaging less than five failures annually—mainly due to fraud rather than undercapitalization or financial risk-taking.[80] Recently, the fallout from the crisis of 2008 has caused the FDIC to handle 25 failing institutions in 2008, 140 failing institutions in 2009, and 157 failing institutions in 2010.[81]

This sharp rise has taken its toll on the Federal Deposit Insurance Fund. 2008-2010 losses to the Deposit Insurance Fund were $19.6 billion, $37.1 billion, and $24.2 billion in 2008, 2009, and 2010 respectively.[82] By the end of 2010 the Federal Deposit Insurance Fund had $27 billion in assets left.[83] Passage of the Dodd Frank Act changed the fee structure so that in 2011, the largest 110 banks shouldered 80% of the premiums paid into the federal deposit insurance fund. [84] The FDIC is expected to collect 14 billion in premiums in 2011.[85] This shifting of premium collection is to ensure that the Deposit Insurance Fund continues to climb out of the negative balance accrued in 2009.[86]

  1. Post-Failure Investigations of Management

The FDIC begins investigating potential liability claims against directors, officers, and other professionals immediately following the close of every failed financial institution.[87] Under internal FDIC policy established during the savings and loan crisis, the FDIC will pursue claims against directors based on: (1) dishonest conduct; (2) insider transactions; (3) violations of internal policies, law, and regulations; (4) failure to establish, monitor, or follow proper underwriting procedures; and (5) refusal to heed regulatory warnings.[88] In March 2009, Martin J. Gruenberg, Vice Chairman of the FDIC testified before the House Financial Services Committee where he counted claims against the directors of failed banks as among the “assets” the FDIC acquires from a failed bank, saying, “[p]rofessional liability activity and recoveries are expected to increase substantially now that institutions are failing and giving rise to significantly increased professional liability claims and investigations.”[89]

When the FDIC is appointed receiver of a failed bank, it “steps into the shoes” of the institution, acquiring “all rights, titles, powers, and privileges of the [bank], and of any stockholder, member, accountholder, depositor, officer, or director.”[90] These broad rights were intentionally drafted to give the FDIC a tactical advantage over potential targets of lawsuits.[91] Directors and officers are often interviewed without any awareness of their risk of personal liability and prior to consultation with their personal attorney.[92]

FDIC post-seizure investigations rely heavily on the use of investigative subpoenas, which command production of documents, emails, and/or require in-person testimony to FDIC attorneys under oath.[93] These subpoenas can be extraordinarily broad in scope—seeking not only bank documents on all of the director’s computers but also the director’s personal tax returns, investment statements, and can even target the director’s spouse.[94]

After the investigation, the FDIC identifies those liable and sends them “demand letters” which require that the accused pay the FDIC a specific sum of money to cover their share of losses of the responsible bank.[95] At this point the FDIC will also use its statutory authority to seek restraining orders, injunctions, and freeze the directors’ assets.[96] The FDIC will also sue and collect from the director’s insurance policies and/or negotiate financial settlements from liable directors.[97]

III: Practical Application: Maximizing Deposit Insurance

During the current uneasy state of the economy, many banking customers may wish to take advantage of FDIC protections and have as much of their assets insured as possible. This final section describes what is and is not insured by the FDIC, and describes some practical measures a normal banking customer can take to maximize their deposit insurance.

  1. Amounts Insured

As a practical matter, if the average banking customer makes a deposit with an institution that later experiences a financial disaster from which it cannot recover, the FDIC will reimburse the depositor for lost deposits up to $250,000.[98] “Thus the FDIC provides a limited guarantee to depositors on the safety of their money.”[99] Some banking customers have significantly more than $250,000 held by commercial banks, and they stand to lose everything over $250,000 if their bank experiences a financial disaster.

  1. Uninsured Deposits

Not every asset procured through a bank is insured. For example, FDIC deposit insurance does not cover U.S. Treasury Securities, and if a customer purchases a treasury bill through an FDIC insured institution which later fails, that customer could not necessarily recover the amount of the treasury bill from the FDIC.[100] Furthermore, the contents of safe deposit boxes are not covered by the FDIC deposit insurance.[101] The contents of safe deposit boxes must be insured through other means.

Customers cannot multiply their coverage simply by maintaining several accounts at the same institution or at different branches of the same institution. As a general rule, deposit accounts maintained in the same capacity by a customer at the same financial institution are not insured separately.[102] Instead the account balances are aggregated to determine the amount of FDIC deposit insurance coverage.[103] This is true even if the different accounts hold different products. For example, if a customer owner a $200,000 certificate of deposit as well as a $100,000 savings account at the same bank, the two accounts will be insured collectively. Fifty thousand dollars will be left uninsured.[104]

  1. Multiplying Deposit Insurance Coverage

There are specific steps that individual banking customers can take to maximize their FDIC coverage. The first way that a customer can increase coverage is by depositing funds in different financial institutions. Separate financial institutions are insured separately, so if a customer has three accounts at three different banks, that customer will have $750,000 of FDIC coverage rather than $250,000.[105]

Joint accounts are also insured separately from each co-owner’s single ownership accounts. [106] So, for example, if a customer has maximized her FDIC insurance with particular banking products in joint accounts with her spouse, she can insure additional amounts at the same institution by titling the accounts as individual accounts. For an account to qualify as a “joint account,” each co-owner must: (1) be a separate human individual; (2) execute a deposit account signature card; and (3) have the same withdrawal rights.[107] Joint accounts are limited to $250,000, the same limit as single accounts.[108]

Under specific circumstances, certain accounts owned by both irrevocable and revocable trusts and certain Payable on Death accounts are also insured separately from the accounts of the owner or the POD beneficiaries.   In order to be insured separately, the funds must (1) be owned by an individual, (2) be payable on death to a “qualified beneficiary”, and (3) the beneficiary must be specifically named in the bank’s records.[109] A “qualified beneficiary” includes the owner’s spouse, children, grandchildren, parents, brothers, and sisters.[110] The accounts are insured up to $250,000 per qualifying beneficiary.[111]

Conclusion

Franklin Delano Roosevelt said the following words when he announced the end of the bank holiday of 1933, “[a]fter all, there is an element in the readjustment of the financial system more important than currency, more important than gold, and that is the confidence of the people.”[112] Throughout its nearly eighty-year history not one penny of insured deposits have been lost. Although the FDIC is far from perfect, and faces many challenges yet to come, the FDIC provides the vast majority of Americans with confidence that their deposits are backed by the full faith and credit of the U.S. government. The FDIC also plays a vital role by monitoring and examining our U.S. financial institutions to ensure their managerial competence, solvency, and safety.

[1] See FDIC Logo at http://www.fdic.gov/consumers/banking/confidence/symbol.html (last visited December 5, 2011)

[2] See FDIC at http://www.fdic.gov/consumers/banking/confidence/symbol.html (last visited December 5, 2011)

[3] “Closed for the Holiday: The Bank Holiday of 1933,” Federal Reserve Bank of Boston, (available at: http://www.bos.frb.org/about/pubs/closed.pdf) (last visited December 4, 2011).

 [4] Id.

 [5] Id.

 [6] Id.

 [7] FDIC: The First Fifty Years at 38.

 [8] Raymond Moley, The First New Deal (New York: Harcourt, Brace & World, Inc., 1966) at 171 (“We knew how much of banking depended upon make-believe or, stated more conservatively, the vital part that public confidence had in assurance solvency.”).

 [9] FDIC: The First Fifty Years at 41.

 [10] Id.

 [11] Moley, The First New Deal at 177. See also, William L. Silber, “Why Did FDR’s Bank Holiday Succeed?” Federal Reserve Bank of New York Economic Policy Review, July 2009 at 19; full text of the Emergency Banking Relief Act of 1933 available at: http://tucnak.fsv.cuni.cz/~calda/Documents/1930s/EmergBank_1933.html (last visited, December 3, 2011).

 [12] Pub. L. No. 73-66, 48 Stat. 162 (1933) (codified as amended in various sections of Title 12 of the United States Code).

 [13] See Generally, Timothy Zinnecker, “When a Hundred Grand Just Isn’t Enough: Fifty Hypotheticals That Explore the Contours of FDIC Deposit Insurance Coverage” 72 Tenn. L. Rev., 1005, n’s.1-9 (Summer 2005) (hereinafter cited as “When a Hundred Grant Just Isn’t Enough”); see also FAIC Sec., Inc. v. United States, 768 F.2d 352, 354 (D.C. Cir. 1985); see also FDIC v. Phila. Gear Corp., 476 U.S. 426, 432 (1986) (noting that “the Nation was in the throes of an extraordinary financial crisis” and observing that “[m]ore than one-third of the banks in the United States open in 1929 had shut their doors just four years later”); Rauscher Pierce Refsnes, Inc. v. FDIC, 789 F.2d 313, 315 (5th Cir. 1986) (observing that “[t]he stock market crash of 1929 and the Great Depression of 1930 focused the attention of Congress upon the need for a solid means of regulation in insuring the nation’s banking system”); Jonathan R. Macey et al., Banking Law and Regulation 20-22 (3d ed. 2001) (describing the banking crisis that occurred between 1929 and 1933).

[14] Lissa L. Broome & Jerry W. Markham, Regulation of Bank Financial Service Activities: Cases and Materials 50 (2d ed. 2004).

[15] Michael P. Malloy, Bank Regulation § 5.24, at 166 (1999); Zinneckar, “When a Hundred Grand Just Isn’t Enough” supra, note 7; see also Jonathan R. Macey et al., Banking Law and Regulation at 33 (3d ed. 2001) (“The once-formidable wall between commercial and investment banking has now fallen, after a long bombardment.”);

[16] FDIC: The First Fifty Years (quoting “Deposit Insurance,” Business Week, April 12, 1933 at 3).

 [17] Milton Friedman and Anna J. Schwartz, A Monetary History of the United States, 1867-1960 (Princeton: National Bureau of Economic Research, 1963) at 357-359 (also the authors argue that it was generally believed that bank failures were an outgrowth of poor banking management and therefore were not subject to corrective action by the Federal Reserve).

[18] New York Times, March 13, 1933 at 1.

 [19] Id.

[20] Jonathan Alter, The Defining Moment: FDR’s Hundred Days and the Triumph of Hope, (New York: Simon and Schuster, 2006); Charles Calomiris and White “The Origins of Federal Deposit Insurance” in Charles Calomiris, ed., U.S. Bank Deregulation in Historical Perspective, 162-211 (Cambridge: Cambridge University Press, 2006).

 [21] John Jay Knox, A History of Banking in the United States (Boston: Bradford Rhodes & Co., 1903).

 [22] Id. See generally, Robert E. Chaddock, “The Safety Fund Banking System in New York State, 1829-1866” printed in Publications of National Monetary Commission Vol. 2, 227-388 (Washington D.C.: Government Printing Office, 1911).

 [23] Clifford F. Thies and Daniel A. Gerlowski, “Deposit Insurance: A History of Failure,” Cato Journal, Vol. 8, No. 3 (Winter 1989); But see Charles W. Calomiris, “Getting the Incentives Right in the Current Deposit Insurance System: Successes from the pre-FDIC Era,” in James Barth and R. Dan Brumbaugh (ed.), The Reform of Deposit Insurance: Disciplining Government and Protecting Taxpayers, (New York: Harper Collins, 1992) 13-35.

 [24] FDIC: The First Fifty Years at 3. See generally, Thornton Cooke, “The Collapse of Bank-Deposit Guaranty in Oklahoma and Its Position in Other States” 38 Quarterly Journal of Economics (Nov. 1923): 108-139; Thornton Cooke, “The Insurance of Bank Deposits in the West” printed in Publications of National Monetary Commission Vol. 7 251-352 (Washington D.C.: Government Printing Office 1911); Erling A. Erickson Banking in Frontier Iowa (Ames: Iowa State Univ. Press, 1971); Howard Preston, History of Banking in Iowa (Ames: State Historical Society of Iowa, 1922); FDIC, “State Systems of Bank Obligation Insurance” 1952 Annual Report 59-72 (Washington D.C.: FDIC, 1952).

 [25] Federal Deposit Insurance Corporation: The First Fifty Years—A History of the FDIC 1933-1983 at 3 (Washington D.C.: FDIC Press, 1984) (hereinafter “FDIC: The First Fifty Years”).

 [26] Id.

[27] See FDIC v. Philadelphia Gear Corp., 476 U.S. 426 (1986) (“Congress’ purpose in creating the FDIC was clear. Faced with virtual panic, Congress attempted to safeguard the hard earnings of individuals against the possibility that bank failures would deprive them of their savings.”); Rauscher Pierce Refsnes, Inc. v. FDIC, 789 F.2d 313 (5th Cir. Tex. 1986) (“Congress established the [FDIC] as part of a system to restore public confidence and to safeguard bank deposits through a comprehensive deposit insurance program sponsored and regulated by the national government.”); FAIC Securities, Inc. v. U.S. et. al., 768 F.2d 352 (D.C. Cir. 1985) (observing that Congress created the FDIC “[t]o restore depositor confidence and stimulate economic growth”); Lissa Lamkin Broome, “Redistributing Bank Insolvency Risks: Challenges to Limited Liability in the Bank Holding Company Structure,” 26 U.C. Davis L. Rev. 937, 942 (1993) (“Federal deposit insurance is intended to ensure customer confidence in banks and thereby eliminate destabilizing runs on troubled banks by their depositors . . . .”); Alfred J. T. Byrne & Martha L. Coulter, “Safety and Soundness in Banking Reform: Implications for the Federal Deposit Insurer,” 69 Wash. U. L.Q. 679, 679 (1991) (“The primary purpose of federal deposit insurance is to promote public confidence in the banking system.”); Edward L. Symons, Jr., “The United States Banking System,” 19 Brook. J. Int’l L. 1, 11 (1993) (“The purposes of the FDIC have remained largely constant since 1933: to maintain confidence in the banking system, protect bank depositors, and promote safe and sound banking practices.”).

[28] See FDIC Logo at http://www.fdic.gov/consumers/banking/confidence/symbol.html

 [30] http://www.fdic.gov/consumers/banking/confidence/symbol.html

[31] See Christopher M. Straw, “Unnecessary Risk: How the FDIC’s Examination Policies Threaten the Security of the Bank Insurance Fund,” 10 NYU J. of Legis. & Pub. Pol’y. 395 (2006-2007).

 [32] Steven A. Ramirez, The Law and Macroeconomics of the New Deal at 70, 62 Md. L. Rev. 515, 543-44 (2003) (citations omitted). One of the sponsors of the Banking Act of 1933, Henry Steagall, offered similar remarks. “[T]he purpose of this legislation is to protect the people of the United States in the right to have banks in which their deposits will be safe. They have a right to expect of Congress the establishment and maintenance of banks in the United States where citizens may place their hard earnings with reasonable expectation of being able to get them out again upon demand.” 77 Cong. Rec. 3837 (1933).

[33] A Brief History of Deposit Insurance in the United States, book prepared for the International Conference on Deposit Insurance (Washington DC: FDIC, 1998).

 [34] Id.

 [35] Id. At 42 (“In a speech marking the dedication of the headquarters building of the FDIC in 1963, Wright Patman, then-Chairman of the House Banking and Currency Committee stated, ‘…I think we should have more bank failures. The record of the last several years of almost no bank failures and, finally last year, no bank failure at all, is to me a danger signal that we have gone too far in the direction of bank safety.’”).

 [36] Id. at 43.

 [37] See Kenneth E. Scott, The Dual Banking System: A Model of Competition in Regulation, 30 Stan. L. Rev. 1, 3-8 (1977). Under this country’s dual banking system, a bank may apply for and receive its charter from a federal regulator (a “national bank”) or a state regulator (a “state bank”). A national bank automatically becomes a member of the Federal Reserve System. A state bank may, but is not required to, opt into the Federal Reserve System. A state bank that does so is referred to as a state-member bank. Members of the Federal Reserve System automatically participate in the FDIC deposit insurance program. State-chartered banks may participate in the FDIC deposit insurance program without becoming members of the Federal Reserve System. Such state-chartered banks are referred to as non-member state banks.

[38] Id. Legislation passed during the catastrophic Savings and Loan crisis eventually restored this ratio to 8.3 cents.

[39] U.S., Congress, Senate, Committee on Banking and Currency, Hearings before a subcommittee of the Senate Committee on Banking and Currency on Bills to Amend the Federal Deposit Insurance Act, 81st Cong., 2nd. Sess., January 11, 23, and 30, 1950 at 27-29. A Brief History, at 44.

 [40] A Brief History, supra note 28 at 44.

[41] Id.

 [42] For the purposes of this article, I do not differ between the Bank Insurance Fund or the Federal Deposit Insurance Fund.

 [43] See Commercial Banks Show Record Profits, 59 Banking Rep. (BNA) No. 9, at 330 (Sept. 14, 1992); Press Release, Fed. Deposit Ins. Corp., Bank Insurance Fund Grew to $13.1 Billion at Year-End, Preliminary Data Show, PR-14-94 (Feb. 22, 1994), available at http:// www.fdic.gov/news/news/press/1994/pr9414.html.

 [44] Black’s Law Dictionary 811-12 (8th ed. 2004).

 [45] See Federal Deposit Insurance Reform Act of 2005, Pub. L. No. 109-171, § 2102, 120 Stat. 9, 9 (2006); Revisions to Reflect Merger, 71 Fed. Reg. 20,524 (Apr. 21, 2006).

 [46] FDIC, Vol. 1, History of the Eighties: Lessons for the Future (1997).

 [47] Id.

 [48] Id.

 [49] George Hanc, “The Banking Crisis of the 1980s and Early 1990s,” FDIC Banking Review 11, No. 1 (1998) at 19. Starting in the late 1990s, the banking industry changed dramatically—relying less on spread-based revenues (i.e. net interest income) and relying more on other income such as non-traditional banking products such as derivatives.

[50] “A Brief History,” supra, note 28 at 53.

 [51] Hanc, “The Banking Crisis of the 1980s and Early 1990s,” at 20-22.; See also, the FDIC: A Brief History, supra note 1 at 46.

[52] Id. at 55; [NTD: cite to the statute]. This authority was used twice, in 1980 with First Pennsylvania Bank (total assets of $8 billion) and in 1984 with Continental Illinois National Bank (total assets $45 billion).

[53] Eisenbeis, “Reforming Deposit Insurance and FDICIA,” Federal Reserve Bank of Atlanta, Economic Review, 1Q 2002.

 [54] Pietro Veronesi and Luigi Zingales, “Paulson’s Gift,” Journal of Financial Economics 2010 at 97-103 (also available at: http://faculty.chicagobooth.edu/brian.barry/igm/P_gift.pdf (last visited December 5, 11).

[55] Scott E. Hein, Timothy W. Koch, and Chrislain Nounamo, “Moving FDIC Insurance to an Asset-Based Assessment System: Evidence from the Special Assessment of 2009,” available at: http://ssrn.com/abstract=1832843 (last visited December 5, 11).

 [56] Dodd-Frank [NTD: Pull full citation]

 [57] See Christine E. Blair & Rose M. Kushmeider, Challenges to the Dual Banking System: The Funding of Bank Supervision, 18.1 FDIC Banking Review 1, 1-4 (2006) (describing the dual state and federal banking system); see also Henry N. Butler & Jonathan R. Macey, The Myth of Competition in the Dual Banking System, 73 Cornell L. Rev. 677, 683-89 (1988) (critiquing the dual system).

 [58] See 12 U.S.C. § 248 (2000) (enumerating the powers of the Federal Reserve Board); The Fed. Reserve Bd., The Structure of the Federal Reserve System, http://www.federalreserve.gov/pubs/frseries/frseri.htm; See 12 U.S.C. § 1819 (2000) (enumerating the powers of the FDIC); id. § 248(a)(1) (directing state nonmember banks to report to the FDIC); FDIC: Who is the FDIC?, http://www.fdic.gov/about/learn/symbol/index.html.

[59] Susan Estabrook Kennedy, The Banking Crisis of 1933, (Lexington: The University Press of Kentucky, 1973; full text of the Emergency Banking Relief Act of 1933 available at: http://tucnak.fsv.cuni.cz/~calda/Documents/1930s/EmergBank_1933.html (last visited, December 3, 2011)

[60] See 12 U.S.C. §§ 1819(a), 1820(b), 1831m (2000) (empowering the FDIC to make examinations and require reports); Office of the Comptroller of the Currency, Problem Bank Identification, Rehabilitation, and Resolution: A Guide for Examiners 1 (2001) (describing the importance of early problem detection in mitigating risk).

 [61] See 12 U.S.C. §§ 1811(b), 1819(a), 1831o (2000) (providing the FDIC the power to act as receiver of insolvent institutions, to liquidate their assets, and laying out statutory requirements for prompt corrective action).

 [62] A detailed description of these examinations is beyond the scope of this article.

 [63] FDIC, History of the Eighties at 422.

 [64] Straw, “Unnecessary Risk,” supra, note 23 at 402.

 [65] Id.; see also FDIC, 1 History of the Eighties: Lessons for the Future, (1997) at 425 available at: http://www.fdic.gov/bank/historical/history/vol1.html (last visited December 3, 2011) (hereinafter cited as, “History of the Eighties”). See also Jesse Stiller, OCC Bank Examination: A Historical Overview, OCC, 1995; Eugene N. White, The Comptroller and the Transformation of American Banking, 1960 -1990 (1992), 32.34.

[66] FDIC, History of the Eighties at 425. In 1995, the FDIC’s Chairman Ricki Helfer ordered her staff to conduct an investigation and analysis of the banking crisis which resulted in the publication of a book which found that the effects of the banking crisis would have been substantially mitigated by adequate on-site supervision by banking regulators (Id. at 402).

[67] Id. at 402.

[68] Id. at 426 n. 17.

[69] FDICIA §111(a); Pub. L. No. 103-325, § 306, 108 Stat. at 2217 (1994); see also, “Expanded Examination Cycle for Certain Small Insured Institutions,” 63 Fed. Reg. at 16,378 (describing this history).

[70] Financial Services Regulatory Relief: The Regulator’s Views: Hearing Before the Subcomm. on Fin. Insts. and Consumer Credit of the H. Comm. on Fin. Servs., 109th Cong. at 1(2005) (statement of Rep. Jeb Hensarling, Member, Subcomm. on Fin. Insts. and Consumer Credit of the H. Comm. on Fin. Servs.).

 [71] Id. at 1 (statement of Rep. Spencer Bachus, Chairman, Subcomm. on Fin. Insts. and Consumer Credit of the H. Comm. on Fin. Servs.).

[72] Straw, “Unnecessary Risks,” supra, note 23 at 411; see also, Financial Services Regulatory Relief Act of 2006, S. 2856, 109th Cong. § 605 (2006), reprinted in 152 Cong. Rec. S5275 (daily ed. May 25, 2006).

 [73] Id. at 418.

 [74] Id. at 419 n. 140-143 and accompanying text.

 [75] http://www.fdic.gov/about/learn/learning/when/1930s.html (last visited December 5, 2011).

[76] Christine Bradley, “A Historical Perspective on Deposit Insurance Coverage,” FDIC Banking Review Vol. 13 No. 2 (Dec. 2000).

 [77] See Office of Inspector Gen., Fed. Deposit Ins. Corp., Audit Rep. No. 03-041, Insurance Determination Claims Process 27 (Sept. 17, 2003), http:// fdicoig.gov/reports03/03-041.pdf (diagramming the insurance claim process); Paul Lund, The Decline of Federal Common Law, 76 B.U. L. Rev. 895, 951 n.233 (1996) (“State or federal banking authorities typically close the failed institution on a Friday and reopen it for services the next Monday”). See also, Christopher Straw, “Unnecessary Risks” supra note 20 at 399-400.

 [78] Id.; See also Dana I. Schiffman, “FDIC Resolution and Receivership of Fails Banks: Opportunities for Real Estate Investors,” available at http://www.allenmatkins.com/emails/FDIC/article2.htm (last visited November 22, 2011); Peter Cahill “It’s Takeover Time: Fresh from and FDIC Assumption Weekend!,” available at http://blog.adsfs.com/?p=106 (last visited, November 22, 2011).

[79] “Unnecessary Risk,” Supra, Note 20 at 400.

 [80] Id.

 [81] FDIC 2010 Annual Report at 43, available at: http://www.fdic.gov/about/strategic/report/2010annualreport/AR10final.pdf (last visited December 5, 2011).

[82] Id.

 [83] Id.

 [84] New York Times, “Big Banks to Pay More in Insurance Deposits” Feb. 7 2011 (available at: http://www.nytimes.com/2011/02/08/business/08fdic.html).

 [85] Id.

 [86] Eric Dash, “As Bank Failures Rise, F.D.I.C. Fund Falls Into Red,” The New York Times Nov. 24, 2009, available at: http://www.nytimes.com/2009/11/25/business/economy/25fdic.html (last visited December 2, 2011).

[87] Samual J. Buffone, “Representation of Former Officers and Directors in FDIC Investigations and Lawsuits,” Practising Law Institute Course Handbook No. 27437 (November 2010) at 422.

 [88] Craig McCrohon, Aaron Stanton, “FDIC Seeking to Recoup Failed Bank Losses from Bank Directors,” Business Law Today, February/March 2011.

 [89] Statement of Martin J. Gruenberg, Vice Chairman, FDIC Federal and State Enforcement of Consumer and Investor Protection Laws before the Financial Services Committee, U.S. House of Representatives (March 20, 2009).

[90] 12 U.S.C. Section 1821(d)(17).

 [91] Buffone, supra, note 55 at 422-423.

 [92] Id.

 [93] 12 U.S.C. Section 1818(n); 12 U.S.C. Section 1821(d)(2)(I).

[94] Id. at 423; see also, W. Scott Sorrels, Gabriel A. Mendel, and Yvonne M. Williams, “FDIC Seeks to Flex Muscles Notwithstanding Large Investigative Backlog,” 128 Banking L. J. 515 (June, 2011).

 [95] Id. at 424.

 [96] 12 U.S.C. Section 1821(d)(19).

 [97] Id. at 424; Statement Concerning the Responsibility of Bank Directors and Officers, FDIC Statement of Policy available at: http://www.fdic.gov/regulations/laws/rules/5000-3300.html (last visited December 5, 2011).

[98] Christine Bradley, “A Historical Perspective on Deposit Insurance Coverage,” FDIC Banking Review Vol. 13 No. 2 (Dec. 2000).

 [99] Mark E. Nance & Bernd Singhof, “Banking’s Influence Over Non-bank Companies After Glass-Stegall: A German Universal Comparison,” 14 Emery Int’l L. Rev. 1305, 1327 (2000).

 [100] See FDIC: “Insured or Not Insured? A Guide to What Is Not Protected by FDIC Insurance,” http://www.fdic.gov/consumers/consumer/information/fdiciorn.html (last visited December 5, 2011).

 [101] Id.

 [102] See 12 C.F.R. section 330.3(a) (2005)

[103] Id.

 [104] See, Zinnecker, supra note 23.

[105] This is true even if the banks are owned by the same bank holding company. See 12 C.F.R. section 330.3(b) (the general rules is not affected “even if two of more separately chartered and insured depository institutions are affiliated through common ownership.”).

 [106] See 12 C.F.R. Section 330.9(c) (2005).

 [107] Id.

 [108] Id.

 [109] See 12 C.F.R. Section 330.10(a) and (b)(2005).

 [110] Id.

 [111] Id. For extensive hypotheticals on this particular rule, see Timothy R. Zinneker, “When a Hundred Grand Just Isn’t Enough,” 27 Tenn. L. Rev. 1005 (Summer, 2005).

[112] Franklin Delano Roosevelt, Fireside Chat on Banking, March 12, 1933, full text available at: http://www.presidency.ucsb.edu/ws/index.php?pid=14540&st=&st1=#axzz1fujQqGoo (last visited November 21, 2011).

 

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