What Happens If a Bank Fails?
How the FDIC protects depositors, including providing quick access to insured funds.
Here's important information about what the FDIC pays and when if an FDIC-insured bank or savings institution is closed by its federal or state government regulator.
How soon after a bank fails can I expect to have access to my insured money?
Federal law requires the FDIC to make payments of insured deposits - all the money determined by the FDIC to be within the federal insurance limits - "as soon as possible" after the failure of an insured institution. In most cases, the FDIC makes insured funds available to depositors quickly, usually on the first business day after the bank is closed.
"The FDIC works very hard before a bank is closed, all very quietly and behind the scenes, to evaluate data and identify the amounts due to insured depositors," said Michael Spaid, who manages an FDIC section that develops policies for handling deposit insurance claims. "It's that advance preparation, followed by long hours of work after the closing, that enables the FDIC to provide insured depositors access to their funds so quickly."
The preferred way to pay insurance on deposits - and the most common one - involves finding a healthy bank to quickly buy the rights to assume the insured deposits and other business of the failed bank. Depositors automatically become customers of the assuming bank, and offices of the failed bank reopen under the name of the acquiring institution - usually by the next business day. Depositors will have full access to their insured funds at branch offices or by check, automated teller machine and debit card.
"The depositors would barely be affected," explained Spaid. "Their insured funds would be preserved and they could continue banking as usual or they could open a new account elsewhere."
If the FDIC cannot find another institution to buy the failed bank's insured deposits, one of two things can happen. The FDIC can transfer the insured deposits to a newly created bank that would be operated by the FDIC. This new bank, referred to as a "bridge bank" or "conservatorship," enables depositors to access their insured funds by the next business day and to maintain other banking services until the FDIC can find a buyer for the new bank. The other alternative is for the FDIC to issue checks directly to depositors, in amounts up to the federal insurance limit. That process can take longer than one business day but usually not more than three business days.
No matter how the FDIC resolves a failed bank, some types of deposits present special challenges that mean it may take the FDIC longer to obtain documentation that is needed to finalize the insurance payments. Examples include accounts linked to a formal written trust agreement, deposits placed by an administrator of an employee benefit plan, and bank certificates of deposit (CDs) sold to the public by deposit brokers. In the case of the latter, the bank's records often only note the name of the broker, not the individuals who made deposits, and it can take more time for the FDIC to gather documentation from the broker and make an accurate insurance determination.
What happens to my money that is over the FDIC's insurance limits?
Let's say you alone have one deposit account at a bank with a balance of $105,000, including interest earned. If your bank fails, you'll immediately be paid $100,000 covered by FDIC insurance and you'll receive a "claim" against the closed bank for the remaining $5,000 that is not FDIC-insured. The amount you recover on your uninsured deposits will depend on how much the FDIC recovers by selling the bank's assets. While that process can take several years, most payments to uninsured depositors are made within a year or two of the bank failure. In some cases, the FDIC is able to make an advance payment to uninsured depositors.
What about other bank services such as safe deposit boxes, loans, credit cards and securities held by the trust department?
Access to the contents of safe deposit boxes typically will be available the next business day after the bank closing.
A loan or credit card you have at the failed bank will either be sold to a healthy bank or retained temporarily by the FDIC, and you'll receive written instructions on where to send future payments. Either way, your use of these loans and your obligation to pay will continue until you are instructed otherwise, in writing, by the acquiring bank and the FDIC.
Securities and other assets held in trust, fiduciary or custodial accounts at a bank are not assets of the failed bank and are not subject to claims by the failed bank's creditors. These assets will either be returned to you or arrangements will be made for another institution to become the new custodian or trustee of your accounts.
How can I get more information about what happens if a bank fails?
You can find useful information, including the FDIC brochure "When a Bank Fails," at www.fdic.gov/bank/individual/failed. Or, call or write the FDIC.
Source: Summer 2008 FDIC Consumer News. This publication may be reprinted in whole or in part. Please credit FDIC Consumer News.