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FDIC (Federal Deposit Insurance Corporation) insurance is important for several reasons:
Depositor Confidence: At the core, FDIC insurance instills confidence in the banking system by assuring depositors that their money is safe, even in the event of a bank failure. This confidence helps maintain financial stability and prevents bank runs, where panicked depositors withdraw their funds en masse, potentially destabilizing the banking system.
Stability of Financial System: By acting as a safety net for depositors, FDIC insurance contributes to the overall stability of the financial system. When depositors know that their funds are protected, they are less likely to withdraw all their money from banks during times of economic uncertainty or financial crises. This stability is crucial for the functioning of the economy.
Encouraging Savings and Deposits: FDIC insurance encourages people to save and deposit their money in banks, which in turn provides financial institutions with a stable source of funding for lending and investment activities. This promotes economic growth and development by facilitating the flow of capital to productive sectors of the economy.
Consumer Protection: FDIC insurance protects individual depositors, including individuals, families, and small businesses, by providing a guarantee that their deposits are covered up to a certain limit (currently $250,000 per depositor per insured bank). This protection ensures that even if a bank fails, eligible depositors will be reimbursed for their losses, up to the insured limit.
Preventing Systemic Risk: In the larger context, FDIC insurance contributes to the prevention of systemic risk, where the failure of one institution could trigger a chain reaction of failures across the financial system. By safeguarding depositors' funds and promoting confidence, FDIC helps isolate and contain the impact of individual bank failures.
Enhancing Financial Literacy: FDIC plays a role in promoting financial literacy and educating the public about the benefits and safety of using insured depository institutions. This education helps consumers make informed decisions about where to place their money and how to manage their finances.
The Bottom Line
In summary, FDIC insurance is essential for maintaining financial stability, protecting depositors, encouraging savings, and preventing the adverse consequences of bank failures on the broader economy. It is a critical component of the U.S. financial regulatory framework that helps ensure the smooth functioning of the banking system and supports economic growth. Banks use the phrase “Member FDIC” to denote that their customers are protected by FDIC insurance.
Armed Forces Bank is a member of the FDIC, providing its customers with the reassurance that their deposits are insured up to $250,000 per account. Learn more about our FDIC-Insured savings options.