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.