Learning that your bank has failed would certainly trigger concern for most banking customers. The common fear is that your hard-earned money disappears when a bank closes down. Unless your bank was not FDIC-insured or your funds exceeded the FDIC-insurance limits, your fears should rarely become reality.
When Your Bank Fails
The decision of the Federal Deposit Insurance Corporation (FDIC) to seize a bank is not made on a whim. Typically, banks are given notices months ahead of time warning them to return to healthy operating conditions. Should the troubled banks fail to function properly, they could be included when regulators announce bank closures on Friday afternoons.
Closing on a Friday afternoon allows the FDIC to complete one of two actions over the weekend:
1. Purchase and Assumption Transaction
The ideal and most common resolution is to have a healthy, FDIC-insured bank assume the deposits of the failed bank. In this case, insured deposits are transferred and depositors automatically become the customers of the healthy bank. The healthy bank also has the option to purchase loans and other assets of the failed bank.
Basically, your money (up the the $250,000 insurance limit) is moved to another bank and you become the customer of this bank by the following business day.
2. Deposit Payoff
When there isn’t another bank to pick up the deposits of the failed bank, the FDIC will send a check to the depositor up to the insured balance. Essentially, you are getting your money back, up the the FDIC’s insurance limit.
Steps You Should Take
1. Finding out your bank has failed
No one expects their bank to fail and the FDIC shuts down banks with minimal public notice. The FDIC and sometimes the assuming bank sends out written mail to all depositors regarding the situation. If you didn’t find out through the news or notices at the failed bank branches, you can visit the FDIC.gov homepage for the latest bank failures.
2. Proceed as you normally would
When there is an assuming bank, all your funds within the FDIC-insured limit will most likely be accessible as usual with little to no service interruption. Go ahead and use your credit cards, debit cards, and checks. Direct deposits will be automatically re-routed to the new account.
3. Expect changes to your financial services
While you can temporarily go about your day-to-day life practically unaffected by a failed bank, the assuming bank will soon incorporate their own financial products with the newly acquired customer base. That means interest rates, perks, and programs offered by the assuming bank may be different than that of the failed bank. Your branch will eventually transition to the new bank’s brand. You will receive new cards and checks.
4. Decide to stay or move
When you do find out that your bank has failed, you should think about whether you want to stay with the assuming bank. Your deposits are now subject to the terms and conditions specified by the account in which your funds are deposited. If their options do not contribute to your financial goals, you may want to look for another bank.
If the FDIC cannot find an assuming bank, all deposit accounts will be frozen. All outstanding transactions and checks presented after the bank failure date will not be processed. This ensures a smoother process for the FDIC to disperse checks for the insured deposit balance.
Keep in mind that this will pose a major inconvenience if your deposit account is the one you use to pay bills. You will remain fully responsible for your financial obligations while the FDIC rushes your check to you. It would be wise to have money at more than one bank in case you are faced with this situation.
When Your Balance Exceeds FDIC Insurance Limits
In both instances, whether your insured deposits are transferred or returned to you, any amount of funds in excess of the FDIC insurance limits will be held as a claim against the estate of the closed bank. You will be repaid if and when the assets of the failed bank are liquidated.
Simon Zhen is a research analyst for MyBankTracker. He is an expert on consumer banking products, bank innovations, and financial technology.
Simon has contributed and/or been quoted in major publications and outlets including Consumer Reports, American Banker, Yahoo Finance, U.S. News – World Report, The Huffington Post, Business Insider, Lifehacker, and AOL.com.