What Happens When an FDIC-Insured Bank Fails?

A number of things happen when an FDIC-insured bank fails, but most people want to know what is going to happen to their money, and when they can expect to retrieve the value of their deposits. The Federal Deposit Insurance Corporation has a very clear set of policies which are followed when one of the banks it insures fails, and one of the primary concerns of the FDIC when dealing with failed banks is making sure that bank customers are affected as minimally as possible by the failure. If you are a depositor in a failed bank or a bank which appears to be on the verge of failing, the important thing for you to know is that the FDIC tries to resolve depositor issues within two business days of a failure notification.

The Federal Deposit Insurance Corporation was established in the United States in 1934, as part of a sweeping series of economic reforms related to the Great Depression. Member banks display placards indicating that deposits are FDIC-insured, and they must pay premiums to the FDIC and register new depositors with the FDIC so that their accounts are insured. Most American banks are members of the FDIC, in part because most consumers look for FDIC protection when deciding where to open a bank account. When someone deposits money in an FDIC-insured bank, the FDIC guarantees the amount of the deposit, up to $100,000 US Dollars (USD) per depositor per bank. Certain retirement accounts are covered up to $250,000 USD. Any depositor in an FDIC-insured bank is covered, regardless as to citizenship status and country of residence.

When an FDIC-insured bank fails, the first step is a formal notice of failure from a government agency which determines that the bank is unable to meet its obligations. Once the FDIC receives this notice, one of two things can happen. The FDIC can take over the bank as its “receiver,” or the bank can be acquired by another bank, in a process known as “purchase and assumption.”

If an FDIC-insured bank fails and is acquired by another bank, depositors are notified of the situation by mail, and the bank usually opens up for business on the next business day. Depositors can continue to use bank cards and write checks until replacements are issued by the new bank. Direct deposits will be routed directly to the new bank, ensuring that there is no interruption in expected direct deposit payments, and customers have the option of continuing to bank with the new bank, or of changing banks.

If a bank is taken into receivership by the FDIC after it fails, customers will be notified of this by mail, and the FDIC will begin to issue payments to the depositors within days. Customers are typically allowed to continue using their bank cards and checks during the receivership period. In the event that a depositor has more than $100,000 USD on deposit, he or she will receive a “claim against the estate” for the excess amount. The claims of the bank's creditors are paid to the fullest extent of the FDIC's ability after it has recouped as many of the bank's assets as it can, although it may take some time after an FDIC-insured bank fails for these claims to be paid.

Often, the FDIC will enter into an agreement with another local bank when it takes a bank into receivership. The partner bank will accept direct deposits on behalf of the failed bank's customers, and it may offer to assume customer accounts, if customers wish to open accounts with the partner bank.

People should be aware that when a bank appears to be on the verge of failing, removing deposits is not advisable. When a bunch of customers pull their deposits out at once in a phenomenon known as a bank run, the bank's liquidity becomes extremely unstable, and the bank run can push the bank into failure. While it can be nerve-wracking to watch a bank struggle, sitting tight is the best thing for consumers to do. It is also a good idea to confirm that your address on file with the bank is accurate, as a bad address can hinder FDIC communications in the event that an FDIC-insured bank fails.