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Bank Failures and FDIC Insured Accounts

By Edited Jun 7, 2015 2 1

When An FDIC Bank Fails

FDIC Insured Money

American Money

During 2009, an average of two banks failed every week in the United States.  Since then, many additional banks have been forced to close each year.  Even if you know that your money is insured because it is in an FDIC insured bank account, this can be an extremely alarming event.  It is hard not to feel panicky, and worried, if you unexpectedly discover that your financial institution has been closed.  Since there is rarely any warning in advance, what can you expect to happen if you drive up to your bank and discover that it has been closed?

The FDIC Banks are Usually Closed Down Over a Weekend

The first thing you should know is that the Federal Deposit Insurance Corporation (FDIC) typically closes failing financial institutions on Friday afternoons, at the end of the business day.  They do this so that the FDIC has the entire weekend to make all the necessary changes, which will include transferring all the accounts to a new company.  The FDIC has already planned for everything in advance; however, they don’t let the bank customers know, because they want to avoid a panic or a run on the bank.  This happened when there were multiple failures in the 1930’s during the depression.  People would rush to their bank and stand in line for hours, withdrawing all their funds.  When the financial institutions did not have enough money on hand and ran out of money, the remaining customers panicked.  In the years since the Great Depression, there have been other panics.  As a result, the FDIC works hard to avoid having frightened customers rush in to withdraw their funds.

To get an idea of the events that can lead to a bank failure and what happens afterwards, you may want to use this quick Amazon link to read "The Lost Bank: The Story of Washington Mutual - The Biggest Bank Failure in American History."  It is very informative.

FDIC Coverage Insures Your Access to Your FDIC Insured Accounts

It is not uncommon for people to worry about how they will get access to their money if their bank fails.  The FDIC is well aware of this fear, and goes to great lengths to assure people that the money in their FDIC Insured accounts will continue to be available if they use a debit card or write a check.  You do not need to worry about continuing to go about routine business over the weekend during a bank failure.

Your Former Bank Branch Could Close

In most cases, your local financial institution will continue operating under new ownership and very little will change other than the name on the door.  However, if your bank is taken over by a large chain that already has branches operating in the same neighborhood, they may eventually close the office that you have been using.  If this happens, your accounts will be transferred to another branch in the same area, and you can begin going there, instead.  It may be inconvenient, but will not result in the loss of your funds.

On rare occasions, the FDIC cannot find another financial institution that will take over the bank that you have been using.  In this case, they will help you set up a new account in another local bank of your choice, and then the FDIC will transfer your money into your new account, up to the amount that is covered by FDIC insurance.

The FDIC Coverage includes most Deposits

Once you are assured that you will continue to have a local account, probably in the same building where you have always banked, you may feel less concerned.  In addition, it is reassuring to know that most accounts are insured by the FDIC for up to $250,000.  This is not $250,000 per family; it is $250,000 per account.  For example, if you and your husband have a joint account, and then you have individual accounts, as well as joint accounts with your children, each of these separate accounts will be insured up to $250,000.

Credit Unions Also Have Insured Accounts

Although not as common as banks, sometimes credit unions also have failed.  Even though credit union accounts are not insured by the FDIC, they are insured by the National Credit Union Administration.  This organization is very similar to the FDIC in that it regulates credit unions and insures their deposits.

Investments Are Not FDIC Insured Accounts

Some people purchase stocks, bonds, mutual funds and annuities through their bank.  These investments are not insured by the FDIC.  However, because the investments are not owned by the bank, they should not be affected by a bank failure.  For example, if you purchased an annuity through your financial institution, the terms of the annuity will usually be unchanged if there is a bank failure, because the annuity will be managed by an outside firm.  Your bank was probably only involved in selling you the annuity; it was not one of their assets.  The terms of your annuity will be unchanged. 

The contents of your safe deposit box are not covered by FDIC insurance, either.  Although you may not be able to get into your safe deposit box the first weekend during the changeover, the box will normally be available to you the following Monday when the bank reopens under a new name.  On those occasions when the financial institution is not going to be reopened, the FDIC will send you a letter and give you instructions about when you will be allowed to enter the bank and retrieve any items you have in your safe deposit box.

The FDIC Will Communicate With You by US Mail

It is very important that bank customers know that the FDIC will communicate with you by mail, NOT by email.  They will also provide you with a toll-free phone number and a website where you can get more information about what is happening with your particular bank.  However, do not give out your account or personal information to anyone who contacts you by email.  This is most likely a fraudulent email.  Neither your bank nor the FDIC will send you an email asking for your account numbers or personal information such as your social security number, driver’s license number or date of birth.   Sadly, there are unscrupulous people who will try to obtain this information from people who are affected by a bank failure.  Don’t let yourself become a victim.

Most important of all, do not panic.  The Federal Deposit Insurance Corporation handles more than a hundred bank failures a year, and they are very well organized and capable of taking care of the details.  As long as you only use FDIC insured banks accounts, and keep your deposits under $250,000 per account, your money will be safe.  You may have to adjust to some changes, such as a new bank branch or new bank employees, but your financial situation should remain relatively unchanged.

If you are interested in reading more about money and investing, you may also be interested in reading some of the articles listed below:

The Long and the Short of Understanding Investment Terms

Starting an Investment Club

Starting a FOREX Investment Club

How to Find Free Stock Research Websites

How to Use Value Line Stock Research Tools

Buy the Best Investment Club Accounting Software

Learn More about What Can Happen When a Financial Institution Fails

The Lost Bank: The Story of Washington Mutual-The Biggest Bank Failure in American History
Amazon Price: Buy Now
(price as of Jun 7, 2015)
This is a fascinating look at one of the worst events in U.S. banking history.
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Comments

Feb 20, 2011 6:23am
pwarlick
I learned many things by reading this article. I never thought about the effects of bank closure on annuities and safety deposit boxes before.
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