In this article:
- What Happens in a Bank Failure
- When Can I Expect to Receive My Deposits?
- How to Keep Your Money Safe From Bank Failures
When a bank fails, the Federal Deposit Insurance Corporation (FDIC) will arrange the sale of the bank customer's assets to a healthy bank, or, less commonly, the FDIC will pay the bank deposits back directly.
Between 2001 and 2022, 561 banks failed, according to the FDIC. That may sound like a lot, but thousands of banks exist in the United States. The truth is, the likelihood of losing your money is extremely small as long as an FDIC-insured institution holds it. In fact, since 1933, no one has lost money due to a bank failure, says the FDIC.
What Happens in a Bank Failure
A bank failure happens when a bank can't pay back its customers or other people it owes money to.
The FDIC is an independent agency of the United States government created in response to the thousands of bank failures that occurred during the Great Depression. The organization was created to restore confidence and stability in the economic system.
One of the main ways it does this is by protecting the money people deposit in banks and savings associations. And unlike other insurances, you don't need to buy deposit insurance; it automatically applies to any deposit account you open at an FDIC-insured bank.
Nearly all banks in the United States are FDIC-insured, which means even if a bank were to fail, your money is protected. The FDIC insures each bank account up to $250,000 per depositor per ownership category, such as single owner or joint owner. If you use a credit union instead of a bank, you'll receive similar insurance coverage through the National Credit Union Association (NCUA). Insurance is one of the primary reasons it's a safer bet to keep your money in a bank account or credit union account than in other places.
Importantly, however, the FDIC doesn't cover or insure investments like stocks, bonds, mutual funds, life insurance policies or annuities (even if these investments are bought at an insured bank).
How the FDIC Helps
When a bank fails, the FDIC steps in to protect you by taking action in one of two ways:
- The FDIC becomes the "receiver" and arranges a different, healthy bank to take over the failed bank's deposits. The FDIC then transfers your money to another FDIC-insured bank, so you'll have a new account in a different bank where your funds will be safe.
- The FDIC can also write a check and send it directly to you to cover money from the account at the failed bank.
When Can I Expect to Receive My Deposits?
If your bank fails, it's understandable to be anxious about what happens to your money and what to expect next. The good news is that the FDIC usually pays insurance within a few days after a bank closing, and sometimes as fast as the next business day.
The FDIC says it usually has staff on site the day a bank fails to identify people who have insured money in the bank. Generally speaking, the process is smooth because another healthy bank is ready to buy the old one and continue the process.
How to Keep Your Money Safe From Bank Failures
Although bank failures aren't too common, you can still take steps to reduce risk and protect your cash. Here are some simple ways to keep your money safe from bank failures:
- Make sure your bank is FDIC-insured. Go to the FDIC website and look up your bank.
- Monitor the health of your bank by keeping up with financial news articles. By monitoring the health of your bank, you can be aware of any potential problems and take steps to protect your money before a failure occurs.
- Know that the FDIC has limits on the amount of coverage it provides. The FDIC covers up to $250,000 per depositor per ownership category, so consider opening additional accounts at another FDIC-insured bank if you plan to hold more than $250,000 individually or $500,000 with a joint account holder.
Your deposits are insured even if they are in different types of accounts at the same bank—but only up to the covered amount. For example, if you have a certificate of deposit (CD), savings account and checking account each with $100,000, and no joint account holder, $50,000 of your money is not insured ($300,000 - $250,000).
The Bottom Line
A bank failure is a rare event, but it can happen. If you are worried about your money in the event of a failure, make sure to check that your bank is FDIC-insured. This way, you can rest easier knowing your hard-earned money is protected.
As someone deeply immersed in the intricacies of financial institutions and their regulatory frameworks, it's evident that understanding the dynamics of bank failures is crucial for every depositor. My expertise in this area is not just theoretical but is grounded in a comprehensive grasp of the subject matter, including the historical context and regulatory measures that have evolved over time.
Let's delve into the concepts covered in the provided article:
Federal Deposit Insurance Corporation (FDIC):
The FDIC is a cornerstone in the U.S. financial system, established as an independent agency in response to the Great Depression. Its primary function is to instill confidence and stability by safeguarding depositors' funds. The FDIC achieves this by providing deposit insurance, automatically applicable to any account in an FDIC-insured bank. This insurance covers up to $250,000 per depositor per ownership category.
Bank Failure:
A bank failure occurs when a bank is unable to meet its financial obligations to customers and creditors. The FDIC plays a pivotal role in managing such situations, ensuring a smooth transition to maintain confidence in the financial system.
FDIC Insurance Coverage:
The FDIC insures various types of accounts, including checking, savings, and certificates of deposit, up to the specified limit. Importantly, this coverage doesn't extend to investments like stocks, bonds, mutual funds, or annuities, emphasizing the distinction between insured deposits and other financial instruments.
FDIC's Role in Bank Failures:
When a bank fails, the FDIC acts as the "receiver" and facilitates the transfer of deposits to a healthy bank. Alternatively, the FDIC can directly reimburse depositors, ensuring a rapid response to minimize disruptions. This approach has proven effective, as evidenced by the FDIC's track record since its establishment in 1933, with no depositor losing money due to a bank failure during this period.
Timing of Deposit Insurance Payouts:
In the unfortunate event of a bank closure, the FDIC strives to expedite the insurance payout process. Typically, depositors can expect their insured funds within a few days, offering a swift resolution to mitigate financial uncertainty.
Mitigating Risks and Ensuring Safety:
While bank failures are infrequent, taking proactive steps to mitigate risks is advisable. Key measures include:
- Verify FDIC Insurance: Ensure that your bank is FDIC-insured by checking the FDIC website.
- Monitor Bank Health: Stay informed about your bank's financial health through news articles to identify potential issues in advance.
- Understand Coverage Limits: Recognize the FDIC's coverage limits ($250,000 per depositor per ownership category) and consider spreading funds across multiple insured institutions if necessary.
The Bottom Line:
In conclusion, while the occurrence of bank failures is rare, depositors can take comfort in the robust framework provided by the FDIC. By staying informed, verifying insurance coverage, and understanding the limits, individuals can play an active role in safeguarding their hard-earned money, contributing to the overall resilience of the U.S. financial system.
