Learn about the history of the FSLIC and which alternatives exist in 2021.
Definition and Examples of the Federal Savings and Loan Insurance Corporation
Before it went defunct in 1989, the FSLIC offered protection against money loss due to institutional failure if a customer had a deposit account at a savings and loan institution. It was created as part of the National Housing Act of 1934, and the Federal Home Loan Bank Board (FHLBB) was responsible for its administration. Customers would have initially had $5,000 in coverage for their deposit accounts at a covered institution under the FSLIC. The limit was doubled to $10,000 in 1950, and further adjustments boosted the coverage to $100,000 by 1980.
Acronym: FSLIC
Let’s say you opened a savings account at a savings and loan institution and deposited $3,000. You then found out that your institution had failed due to poor lending practices, but you didn’t have a chance to withdraw your money before this occurred. Had this happened before the establishment of the FSLIC, you would have lost your $3,000 and could have ended up in a bad financial situation. But with FSLIC coverage in place, your $3,000 would be reimbursed.
How the Federal Savings and Loan Insurance Corporation Worked
Congress created the FSLIC in response to the effects of the Great Depression when many savings and loans institutions failed. The savings and loan institutions covered under the FSLIC differed from commercial banks because they focused on offering mortgages. They used the money customers deposited to extend these long-term loans. Savings and loan institutions were often at risk for failure if customers took money out of their accounts during times of high interest rates and economic panic. During the Great Depression, many borrowers were unemployed and couldn’t afford to pay their mortgages due to the economic conditions at the time, so the savings and loan institutions became insolvent. Depositors were left without their savings when this happened, unless they’d been able to go to the institution soon enough to take out all their money. These issues made the FSLIC necessary, as it encouraged people to deposit their money without fear of losing it and helped make the industry more stable. Savings and loan institutions would pay annual premiums for each $100 in deposits they held to secure this FSLIC coverage. These premiums would adjust over time and provide the government with reserves in case of institutional failure. If your savings and loan institution failed, the cash reserves would help get your deposited money back up to the insured limit at the time. The FSLIC not only helped make consumers feel more confident about saving money at one of the covered institutions, but it also helped the mortgage and real estate industries. Savings and loan institutions would have more deposits from improved customer confidence, so they could use the money to extend mortgages to more borrowers.
How the FSLIC Was Abolished
The FSLIC protected deposits for several decades, but the risky savings and loan industry would continue to experience problems as coverage limits, interest rates, and inflation rose. Savings and loan institutions lost customers during the 1970s when consumers found more competitive interest rates elsewhere. High interest rates also negatively impacted mortgages. The government took various steps to try to help the industry in the 1980s, including unsuccessful deregulation Many institutions failed or were operating under forbearance. The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 would abolish the FSLIC, which had gone bankrupt, along with its parent, the Federal Home Loan Bank Board (FHLBB).
Alternatives to the Federal Savings and Loan Insurance Corporation
The FSLIC no longer provides insurance for deposits since it went bankrupt and dissolved in 1989. The Federal Deposit Insurance Corporation (FDIC) and the National Credit Union Administration (NCUA) offer the same kind of benefits instead, depending on the type of financial institution you do business with.
The Federal Deposit Insurance Corporation
The FDIC was established by the U.S. government with the Banking Act of 1933. It originally offered protection for a maximum of $2,500 of your deposits at a commercial bank. The coverage extends to savings and loans institutions after the dissolution of the FSLIC. It provides a maximum of $250,000 in protection per depositor when you use an insured financial institution. Qualifying accounts include common options like certificates of deposit and checking accounts, but they exclude investment products such as stocks and mutual funds. If your FDIC-insured bank fails, you’ll either receive a check for your insured account balance or obtain a new bank account with the same balance elsewhere. You should receive this money within a few days after the bank fails, even though the process the FDIC goes through to liquidate the failed bank’s assets can take years. You’ll often receive some payments from the FDIC after liquidation completes if you had funds over the FDIC limit.
The National Credit Union Administration
The NCUA offers the same type of coverage when you deposit your funds at a credit union that carries federal insurance. This agency came about in 1970 through the creation of the National Credit Union Share Insurance Fund (NCUSIF). The NCUA originally had an insured deposit limit of $20,000 per member. The covered amount would eventually grow to $250,000 by 2008. As with FDIC coverage, the $250,000 limit applies to accounts in different ownership categories. It’s possible to have more coverage at the same credit union if you have accounts for retirement and trusts. The restrictions at the FDIC also apply to the NCUA. You don’t have coverage for investment products like annuities and stocks.
