Banks are allowed (and usually encouraged) to lend or invest most of the money deposited with them instead of safe-keeping the full amounts. If many of a bank’s borrowers fail to repay their loans when due, the bank’s creditors, including its depositors, risk loss. Because banks rely on customer deposits that can be withdrawn on little or no notice, banks are prone to what we call a Run on Banks! This is where depositors seek to withdraw funds quickly ahead of possible bank insolvency. Because banking institution failures have the potential to trigger a broad spectrum of harmful events, including economic recessions, policy makers maintain deposit insurance schemes to protect depositors and to give them comfort that their funds are not at risk.
The Federal Deposit Insurance Corporation (FDIC) is an independent agency of the United States federal government that preserves public confidence in the banking system by insuring deposits. The FDIC is headquartered in Washington, DC, with several regional offices and numerous field offices throughout the U.S.
The FDIC was created during the Great Depression of the 1930s in response to widespread bank failures and massive losses to bank customers. The Funds for the agency are provided in the same way as the funds for a private insurance company but on a larger scale. Premiums are paid by all participating institutions. A total of over $3 trillion ($3 million million) in U.S. dollars is insured by a fund of approximately $50 billion ($50 thousand million).
Since 2008 financial crisis the FDIC raised individual limits from $100k to $250k per account; however these changes were set to expire. So the best way to find out if your deposits are fully insured is to check with your local bank.