Bank Failures

In tough economic times, businesses large and small are threatened with failure. It’s sad when your favorite grocery store has to shut its doors forever, but you’ll always be able to find bread and milk somewhere else. What if the failed business is your bank? Now we’re talking worse than sad; we’re talking terrifying.

Bank failures – and there have been many during this downturn – bring to mind images of Great Depression-era depositors waiting nervously in long lines to withdraw their life’s savings . . . and leaving with nothing.

Times have changed in a big way

In one extremely important way, times have changed. Chances are excellent that the money you have deposited in a bank is insured by an agency of the federal government and you will still have it after, heaven forbid, your bank fails. You can thank the Federal Deposit Insurance Corporation (FDIC).

Deposit insurance to the rescue

The FDIC was established in 1933 to increase the stability of the U.S. banking system. The agency protects depositors against loss of their insured deposits if an FDIC-insured bank fails. The FDIC likes to say that no bank customer has ever lost a single penny of insured deposits in the agency’s history. Consider it a lifejacket for your savings. However, it’s crucially important for you to know that not all banks are FDIC-insured, and not all money held by FDIC-insured banks is insured.

Limits on coverage

It’s true that FDIC deposit insurance covers most depositors’ accounts, dollar for dollar. But there are limits. The basic insurance amount – recently and temporarily raised from $100,000 — is $250,000 per depositor per insured bank. The insurance covers checking accounts, savings accounts, money market accounts and certificates of deposit. Depending on the type of account, you can deposit more than $250,000 at one insured bank and still be fully insured.

Multiple accounts and multiple banks

However, if you have more than $250,000 to deposit, it’s best to open accounts at more than one bank – not more than one bank branch, but more than one bank – so that you do not exceed the maximum that can be insured. (The maximum amount in any one account at any one bank will return to at least $100,000 per depositor on Jan. 1, 2010, so it will then be best to break up large deposits into segments of $100,000 and divvy them up among several banks.)

What is a bank closure?

A bank fails when it can no longer meet its obligations to depositors. When this happens, the FDIC tries to find a buyer for the failed bank, with the goal of reopening it the very next day. If a buyer cannot be found and the bank is closed, the FDIC continues to search for a buyer while managing the failed bank’s operations. The agency will begin mailing out checks for insured deposits within two business days of the bank’s closing, so you’ll have access to your money right away. But the closed bank’s ATMs will stop working. Your checks could bounce. And the accrual of interest on your accounts will cease.

A buyer minimizes the turmoil

The best you can hope for is that an open bank will take over the failed bank, and immediately. That’s what usually happens. Here’s how it affects banking services:

* ATMs and debit cards. They’ll work as if nothing had changed.
* Interest. The open bank will reestablish the accrual of interest on your accounts.
* Direct deposits. All direct deposits will be redirected to the acquiring bank.
* Checks that haven’t cleared. There will be no interruption in the processing of checks drawn on the failed bank. It’s smart to notify your creditors of the bank closing, just to be sure.

What happens to loans?

Wouldn’t it be nice if the closing of your bank would absolve you of all duty to repay loans from that bank? It doesn’t work that way. Whether or not the closed bank is acquired by another bank, you remain obligated to repay all loans. The FDIC will notify you within a few days after a bank closure as to where to send payments.