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ABILITY-TO-PAY PRINCIPLE: A principle of taxation in which taxes are based on the income or resource-ownership ability of people to pay the tax. The income tax collected by our friends at the Internal Revenue Service is one of the most common taxes that seeks to abide by the ability-to-pay principle. In theory, the income tax system is set up such that people with greater incomes pay more taxes. Proportional and progressive taxes follow this ability-to-pay principle, while regressive taxes, such as sales taxes and Social Security taxes, don't.

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FEDERAL DEPOSIT INSURANCE CORPORATION:

An independent agency of the federal government that insures deposits in banks and other depository institutions which is intended to preserve and promote public confidence in the U.S. financial system. The Federal Deposit Insurance Corporation (FDIC) was created in 1933 in response to the thousands of bank failures that occurred during the Great Depression. It is one of the key agencies, along with the Federal Reserve System and Comptroller of the Currency, responsible regulating the U.S. banking industry.
The Federal Deposit Insurance Corporation (FDIC) insures deposits at banks and similar depository institutions. However, it only insures these sorts of deposits. Other financial instruments, such as equinities, securities, or mutual funds, are not insured by the FDIC. The FDIC is located in Washington, D.C. although it maintains several branch offices around the country.

The FDIC is fully funded (1) by premiums that banks and saving institutions pay for deposit insurance coverage and (2) from earnings on investments in U.S. Treasury securities. As an independent agency, it does not receive funds from the general treasury.

The management body of the FDIC is composed of a five-person Board of Directors. These folks are appointed by the President and confirmed by the Senate with the constraint that no more than three can be from the same political party.

A Bit of History

After the stock market crash of 1929, the first few years of the Great Depression of the 1930s saw the failure of thousands of banks. Banks failed when their liabilities exceeded assets for an extended period, and they were simply forced out of business. As a response, the FDIC was created in 1933 to provide federal government support of bank deposits. The main objective of the FDIC since its creation has been to maintain stability and public confidence in the nation's banking system.

How it Works

  • In principle, the FDIC operates much like any private insurance company. It collects insurance premiums from its customers--the banks--in return for the assurance that it will stand behind, or be ready to pay off, any deposits that the banks cannot.

  • When a bank or saving institution fails and is closed by its chartering authority (which can be the Office of the Comptroller of the Currency, or the Office of Thrift Supervision), the FDIC responds immediately to protect insured depositors.

  • In most cases, the FDIC resolves a failure by selling the deposits and loans of the failed institution to another institution. In this way, customers of the failed institution automatically become customers of the assuming institution. The solution can be costly for the owners of the failed institution, but it is usually a seamless transaction for the customers.

  • In other cases, the FDIC simply pays back the customers of the failed institution the amount of their insured deposit, up to the maximum legal limit. The customers can then redeposit this money in another institution of their choosing.

FDIC Insured and Uninsured

Although insurance by the FDIC is very broad, it has some limitations. The FDIC insures the following bank deposits:

  • Checking Accounts, including money market deposit accounts.

  • Savings Accounts, including passbook accounts.

  • Certificates of Deposit.

  • Retirement Accounts.

The FDIC does not insure the following:

  • Investments in mutual funds which include stock, bond, or money market mutual funds at nonbank financial institutions.

  • Annuities, which are underwritten by insurance companies, but also sold at some banks.

  • Stocks, bonds, Treasury securities or other investment products, whether purchased through a bank, a broker or a dealer.

Other Important Functions

Insuring deposits in banks and saving institutions is not the only function of the FDIC. As part of its efforts to maintain, endorse, and promote public confidence in the U.S. financial system, the FDIC also monitors and addresses risks to the deposit insurance funds and helps to curb the negative effects on the financial system when a bank or saving institution does not operate properly.

Two other important functions of the FDIC include:

  • It examines and supervises thousands of banks and savings institutions, which account for more than half of the institutions in the banking system.

  • It is the primary federal regulator of banks that are chartered by the states that do not join the Federal Reserve System.

<= FEDERAL DEFICIT, AGGREGATE EXPENDITURES DETERMINANTFEDERAL FUNDS =>


Recommended Citation:

FEDERAL DEPOSIT INSURANCE CORPORATION, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2022. [Accessed: June 27, 2022].


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     | financial markets | Comptroller of the Currency |


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And For Further Study...

     | paper economy | Congressional Budget Office | Internal Revenue Service | government functions | investment borrowing | two-sector, three-market circular flow |


Related Websites (Will Open in New Window)...

     | Federal Deposit Insurance Corporation |


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