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What Happens if Your Bank Fails?

If your bank fails, what does that mean for you? Well, if you’re like my dad in 1970, it means pretty much nothing of note. The local bank he was using failed but he didn’t even hear about it until a year later. The Feds had taken it over and a year later he learned about the whole thing when it was taken over by another bank.

For customers, life went on. Money was available.

Of course, in our current climate it’s much more likely you’ll hear about banks failing because many are concerned that they’ll be next.

My hometown newspaper (and I come from a state where banking is HUGE business) recently printed some questions/answers regarding bank failures & takeovers. I thought I’d share the short version on here.

Government takeover of the bank

If the government takes over a bank, it’s called a “conservatorship.” A regulator is appointed to run the company and oversee operations. The goal here is to increase the institution’s value for a future takeover by another bank and to make sure that the bank’s customers still have access to its services.

The FDIC insurance covers up to $100,000 in savings/CDs/etc held by a single person at a single institution. So customers with less than $100,000 shouldn’t be affected because any lack of funds on their bank’s part will be made up during the government takeover.

Which banks are at risk?

Well, there’s a list at the FDIC but they’re not sharing. I suppose that this is to keep customers from panicking and withdrawing their money. The former head of the FDIC, John Bovenzi, emphasized that they don’t expect all the banks on the list to fail.

IndyMac was the 5th banking instution to fail this year. But not all of those have been big enough to make national headlines. The article notes that 2,808 banks failed in the decade between 1982 and 1992. That sounds like 280/year which seems pretty high to me. But even if our country got past 28/year average failure, then this doesn’t look quite so bad.

Is My Money Safe?

For now, it should be. FDIC insurance automatically covers up to $100,000 per institution per person. So if you have two accounts (one savings, one CD) at a bank and each has $75,000 in it, then the last $50,000 isn’t insured.

If you’re on a joint account, then it’s $100,000 per person on that account. So you and your spouse/partner could collectively have $200,000 in that account and still be covered.

The article notes that many retirement accounts (IRAs, 401(k)s) are insured to $250,000/person. You’d have to check on yours, of course.

The FDIC also has a (PDF) brochure explaining more about its insurance if you want to check that out.

How much money does the FDIC have?

Good question. They have nearly $53 billion. If they needed more, they would borrow the money from other banks and banking fees in general would probably go up. But if only a few banks fail, then it should be fine with covering them.

For example, the IndyMac takeover may cost $4-$8 billion. Not great, but also not enough to take down the FDIC. If a smaller local bank fails, it should cost even less.

The FDIC probably couldn’t insure every bank failing at the same time (since it wouldn’t have other banks to borrow money from) but it doesn’t see that as likely to happen.

So to conclude…

This economic climate isn’t ideal. I believe that we’re actually in a recession, though those are much easier to call in retrospect than at the time. But the country has made it through recessions before. If things get worse and more banks fail, there’s a safety net.

For now if your bank fails, you’re probably ok as long as you’re covered by FDIC insurance. Just make sure that you don’t put in more than they’ll insure unless you’re willing to take the chance. You may not even notice the difference.


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{ 11 comments… read them below or add one }

David July 15, 2008 at 11:27 am

Mutual funds are not insured at all, so if anyone has any money in them at an at-risk bank, it could get uncomfortable very quickly…that being said, please don’t go and just pull all your money out of them!

mrsmicah July 15, 2008 at 11:29 am

Good point, David. Most investing isn’t insured and I’m not sure how insurance works covering 401(k)s & IRAs…that would be something to check with your plan’s administrator.

But pulling your money out just makes things shakier.

RacerX July 15, 2008 at 11:44 am

Two things about the FDIC:

1. If a lot of banks go out and eat the entire $53B, the FDIC will get government backing.

2. IF the bank isn’t liquidated to someone else it can take up to a year to get your money. Part of the buyout deal says that FDIC deposits have to be covered first to gain control of a bank. But if no one buys then you go through what is basically an insurance claim.

So, always have liquidity. Don’t put all of your funds in any one place.

Laura July 15, 2008 at 4:09 pm

Thanks for he reminder. It pays to be prepared ad not panic if something like this does happen.

Cath Lawson July 15, 2008 at 4:19 pm

Hi Mrs M – this post has reassured me. Many banks in the uk are suffering & the bank where my kids have accounts is in big trouble. I had forgotten about insurance so hopefully their cash will be safe.

Dad July 15, 2008 at 5:47 pm

For most of us, $100,000 per person is more than we’re dealing with. Long before that I would be in some type of investment. However, I did read recently that there is some sort of account one can set up through a participating bank that spreads your balance over multiple banks so that it is all FDIC insured. If you are in that situation, ask your banker about it. It is probably more convenient than managing multiple accounts.

Scott@ The Passive Dad July 15, 2008 at 5:57 pm

It is very alarming to read how many people have over $100k invested at Indymac. I read that individuals or families with more than $100k, may only recover 50% of assets. Not Enron stock or Worldcom stock, Cash. Wow! This is a great lesson to call your bank and find out what options you have for balances over $100k.

Andrew Stevens July 16, 2008 at 12:34 am

Cath Lawson, you should be aware that the U.K.’s deposit insurance is not as generous as the U.S.’s. Before the failure of Northern Rock, only the first 2000 pounds was 100% covered; the next 33,000 pounds was only 90% covered. However, I think Parliament changed the laws after Northern Rock so it now covers the first 35,000 pounds 100% which should protect virtually everybody. (Not so with the old rules; it’s easy to imagine having more than 2000 pounds in a savings account and having some money at risk.)

Part of the reason why the U.K. had a bank run and the U.S. has not (despite more banks in trouble) is because U.S. customers have good reason to be confident that bank failures will be handled in an orderly fashion without anybody losing their money (or even access to their money).

plonkee July 16, 2008 at 8:05 am

Andrew:
That’s right about the insurance limits on deposits in UK banks, although I think that the reason the run on Northern Rock was so widely reported is that it’s extremely rare for a bank to fail in the UK, whereas in the US there are a handful every year. This is partly a function of having consolidated banks.

ConnieB July 16, 2008 at 11:18 am

This is an excellent article. I can honestly say that I’ve haven’t seen anything like it anywhere before.

I think we probably will see more than the average number of banks fail in the next couple of years, and I definitely agree that we’re in a recession.

Good to go over how we are covered at our own banks, really, reading the article made me feel better lol. Thanks!

Mrs Micah's Mom July 16, 2008 at 8:13 pm

Technically, we aren’t in a recession since the last quarter showed some economic growth. A 5.5% unemployment rate isn’t characteristic of a recession, either.

Recessions aren’t the only type of severe economic problem. I think it’s high inflation and lack of money for loans that make people recognize that the economy is in trouble and they translate that recognition into belief that there’s a recession.

Inflation is a bad problem in itself and it encourages bad decisions in personal finance. In the late ’70s and early ’80s, people tended to go into debt on the theory that if they waited, whatever they wanted would cost more than the current cost plus interest. I valued my freedom too much to fall into that trap, but a lot of otherwise smart people did.

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