In light of everything that has been going on for the last couple of weeks in our financial system, I decided to go look up exactly what happens when a bank fails. Lucky for me, and for other consumers, the FDIC puts it right on their website – no digging around like a typical governmental site! So without further ado, here is what happens when your bank fails:
What is a bank failure?
A bank failure is the closing of a bank by a federal or state banking regulatory agency. Generally, a bank is closed when it is unable to meet its obligations to depositors and others. The term “insured bank” means a bank insured by FDIC, including banks chartered by the federal government as well as most banks chartered by the state governments.
What is FDIC’s role in a bank failure?
In the event of a bank failure, the FDIC acts in two capacities: First, as the insurer of the bank’s deposits, the FDIC pays insurance to the depositors up to the insurance limit. Second, the FDIC, as the “Receiver” of the failed bank, assumes the task of selling/collecting the assets of the failed bank and settling its debts, including claims for deposits in excess of the insured limit.
What is the purpose of FDIC deposit insurance?
The FDIC protects depositors’ funds in the unlikely event of the financial failure of their bank or savings institution. (Seems to be getting more and more likely though, no?) Deposit insurance covers the balance of each depositor’s account, dollar-for-dollar, up to the insurance limit, including principal and any accrued interest through the date of the insured bank’s closing. The basic insurance amount is $100,000 per depositor, per insured bank. This includes principal and accrued interest up to that amount. The $100,000 amount applies to all depositors of an insured bank except for owners of certain retirement accounts, which are insured up to $250,000 per owner, per insured bank. Types of deposit products include checking, NOW, and savings accounts, money market deposit accounts (MMDA), and time deposits such as certificates of deposit (CDs).
Who does the FDIC insure?
Any person or entity can have FDIC insurance on a deposit. A depositor does not have to be a citizen, or even a resident of the United States. FDIC insurance only protects depositors, although some depositors may also be creditors or shareholders of an insured bank.
What is the source of funding used by the FDIC to pay insured depositors of a failed bank?
The FDIC’s deposit insurance fund consists of premiums already paid by insured banks and interest earnings on its investment portfolio of U.S. Treasury securities. No federal or state tax revenues are involved. (Until now, when we have to bail out all these banks with our tax dollars)
How am I notified when my bank has been closed?
The FDIC notifies each depositor in writing using the depositor’s address on record with the bank. This notification is mailed immediately after the bank closes. (I am thinking you will already know your bank is closed by the time you get this letter)
So there you have it, that’s what happens when a bank closes. For the most part, you really have nothing to worry about – it will be a slight hiccup and maybe a few days before you can touch your money. But your money, as long as it is within the insurable amounts, will be fine.