• Mon. Oct 7th, 2024

What Happens if Your Bank Fails? – Here is All You Need to Know

Louise Villalobos

ByLouise Villalobos

Jan 6, 2024

As an American citizen, the first thing you need to understand is that in the event your bank fails, you will not lose all your funds as long as your bank is insured by the Federal Deposit Insurance Corporation (FDIC). This government agency usually informs you of a bank failure and finds ways to refund you.

Keep reading this article to learn how FDIC works and why banks fail.

Why Banks Fail

A bank will fail when it becomes insolvent, or its assets’ value drops below what it owes to depositors and creditors. In most cases, banks don’t store user funds. Instead, they lend the funds to customers or use them to invest. Therefore, these financial institutions are likely to become insolvent if they inject user funds into poor investments or lend money to businesses or people who fail to meet their loan obligations.


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What Happens if Your Bank Fails?

The moment a bank is unable to meet its obligations to creditors and customers, the FDIC takes over. Here is what usually happens:

1. The Federal Depository Insurance Corporation announces the closure of the bank, and then it becomes the bank’s receiver. The FDIC will use assets owned by the bank to pay creditors and depositors.

2. The FDIC can try to enter a deal with another bank to acquire the failed financial institution. If an agreement is reached, customers’ accounts will be transferred to the new bank. You will be notified about the transfer.

3. In case the FDIC doesn’t find another bank to take over the failed institution, the government agency will send reimbursement checks to depositors as soon as possible.

It is important to note that the FDIC only insures deposits of up to $250,000 per customer. That is why it is advisable to open another account with a different bank if your balance exceeds $250,000.

Bank Failures Examples

Bank failures have been uncommon since the Federal Deposit Insurance Corporation was established in 1934. Prior to the FDIC establishment, thousands of financial institutions had failed. For instance, in 1933, more than 2,000 banks failed.

Bank failures are still occurring due to various reasons. Here are some bank failures that have happened in recent years.

Signature Bank and Silicon Valley Bank: These two financial institutions abruptly shut down in 2023 as news regarding their financial troubles made rounds on social media platforms, causing panic among depositors, who rushed to pull their funds.

The biggest bank failure: WaMu (Washington Mutual) is the biggest bank failure in regards to assets. The financial institution collapsed in 2008 during the financial crisis. At the time, WaMu had over $300 billion in assets. It was taken over by JPMorgan Chase.

Continental Illinois National Bank and Trust Co: This bank encountered financial problems in 1984 following rumors that there was a bank run at one of its branches. At the time, withdrawals worth $10.8 billion were made.

Do You Lose Money If You Have Multiple Accounts in a Single Bank?

In case you hold several accounts, such as a savings and checking account, with a single bank, and they have a combined balance of, say, $350,000, then the FDIC will not fully insure you. That means you are likely to lose $100,000 because the accounts are under a single ownership.

However, if you co-own one of the accounts with your partner, the FDIC will fully protect you.

It is worth mentioning that if the FDIC manages to secure an acquisition deal with another financial institution, then you will not lose any money, even if your deposit exceeds $250,000. That is because your funds will be transferred to the new bank. For instance, customers of First Republic Bank did not lose money when the bank collapsed last year because JP Morgan Chase acquired it.

Conclusion

As you can see, you are unlikely to lose money if your bank is FDIC-insured. However, expect some small inconveniences, like applying for a new debit card, when your bank collapses.

Louise Villalobos

Louise Villalobos

Louise Villalobos is an adept writer, renowned for her compelling articles that illuminate and engage. Her prowess in breaking down intricate subjects provides readers with clarity and nuance. With a vast and varied portfolio, Louise has solidified her standing as a distinguished voice in contemporary journalism.