The U.S.A. erupted in an unprecedented economic crisis 1929 when the stock market suddenly crashed due to sudden margin calls. This period is referred to as the Great depression and it lasted for more than five years. During this depression more than 9100 banks in the U.S.A. went bankrupt. This almost led to the complete destruction of the banking system. The reason for the majority of the failures was what are referred to as "runs" on the banks. This is when panic stricken depositors flood into the bank and demand to withdraw all of their deposits immediately. As more banks failed to satisfy customers, the runs increased. The banks had invested the depositors money and so were unable to meet this demand for cash from everyone at once. The more banks that failed in this the greater the panic became. At that time there was no insurance or safety system in place and many depositors lost everything when the banks closed. Following this crisis it became that steps had to be taken to prevent this kind of thing from happening again. Both the banking system and the depositors needed some sort of safety system. In order to accomplish this the US Congress passed the Glass Steiger Act in 1933. This act established a government backed insurance organization to protect investors and regulate the banking industry. This organization is called the Federal Deposit Insurance Company (FDIC). The establishment of the FDIC instantly stopped the runs still occurring on several banks. It also set up a system to prevent future runs from occurring. Even in the present day the FDIC is in place. If a run on a bank begins the FDIC safety system becomes active. The system has so far been extremely successfully and has had the benefit of not preventing runs but also in assisting banks to avoid bankruptcy. Currently over 70 other countries have instituted similar programs modeled on the FDIC system. The FDIC system set up a safety unit and all members pay insurance premiums to this safety unit. In the event of some failure, the insurance will pay depositors, with in a set limit, when the bank is unable to pay. In the event that this happens, the safety unit also sends experts to help the bank manage its debts and assets. This is done with the aim of restoring the bank to solvency if possible, and dissolving it a reasonable way that will cause as little damage to other institutions as possible. If the bank, with the help of the safety unit, is able to recover, the safety then exits. The Deposit insurance system has administrative authority and has some discretion in any interventions that become necessary. The central deposit insurance has three key elements to its' safety net. They reduce the depositor's loss risk. All deposits are insured by the system, which is backed by the government. This means that, with in the limits set by the FDIC, the depositors will not lose their money even if the bank does in fact go bankrupt. This improves people's confidence in the banking system as a whole, making runs far less likely. Even the failure of more than one bank in the system will not cause the panic seen in the 1930s. Thus, the failure of a few banks will no longer have the effect of destroying an entire system.
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