It can be unsettling when your bank fails. No advance notice is given to the public before the institution is closed because officials don’t want to create a run on the bank. If you were a Washington Mutual customer, you knew it was in trouble because it was in the news. But sometimes it’s not nearly so obvious.

See 2009 list of failed banks and 2010 list of failed banks.

Customers can have a complicated relationship with their bank. Checking, savings, loans, mortgages, safe deposit boxes and all the other services banks provide become a routine part of our lives. A disruption in service can be more than a hassle. It can mean late payments, running out of cash or no access to important documents.

The regulator of a failed bank usually names the Federal Deposit Insurance Corp., or FDIC, as receiver. In addition to ensuring customers receive all of their insured deposits, the agency strives to make the closing as hassle-free as possible.

With the help of information culled from the FDIC Web site and an interview with FDIC spokesman David Barr, we’ve assembled some information about what usually happens when a bank fails. Included are most of the services that would affect the typical retail consumer. Of course, the various descriptions won’t fit every bank failure, and sometimes services such as ATMs won’t work when they should or loans won’t be seamlessly transferred.

When a bank or thrift fails there are three common scenarios:
  1. Another institution acquires the complete institution.
  2. The insured deposits are acquired but the uninsured deposits and the loans are left behind with the FDIC.
  3. There is no buyer and the FDIC runs the bank until it can find a buyer(s).

For the most part, a failed bank is closed on a Friday. Often, the institution reopens under the acquirer’s name — or under the FDIC — by Monday, although occasionally it happens sooner and the bank may open on a Saturday. In the case of the JP Morgan Chase takeover of Washington Mutual, WaMu’s branches never closed. There are times when the name change doesn’t take place right away, even though the acquiring institution has taken over.

The following information applies to the various bank closing situations mentioned above. If there is a difference between what would happen when a bank is acquired versus what happens if the FDIC has to run the bank, it will be noted.

Types of bank services affected
1. ATM/debit cards 10. Dormant accounts
2. Automatic payments/escrows 11. IRAs
3. Automatic direct deposits/withdrawals 12. Loans
4. CD accounts 13. Online services
5. Checks 14. Overdraft line of credit
6. Deposits 15. Night deposit boxes
7. Insured deposits 16. Safe deposit boxes
8. Uninsured deposits 17. Tax information
9. Brokered deposits 18. Trust accounts

1. ATM/debit cards — You should have access to your funds though an ATM, but transactions during the time the bank is closed may not be posted to your account right away. It’s your responsibility to keep track of your transactions.

“ATMs are taken offline for processing,” Barr says. The consumer never knows it. They’re taken offline all weekend from the FDIC’s standpoint, so if you use the ATM, that money is not being posted or withdrawn from your account. We have to balance the books so that on Monday morning we know exactly how the bank looked when it was closed. While customers can use ATMs over the weekend, technically those transactions won’t hit the account until Monday morning.”

2. Automatic payments/escrows — There should be no disruption in service, but check your account to be sure. If the payment wasn’t made, contact the loan officer at the acquiring bank or call the FDIC if it’s running the bank or it is handling the loans. The FDIC will publish a phone number on its Web site and in news releases for these types of concerns.

3. Automatic direct deposits/withdrawals — Automatic direct deposits and/or automatic withdrawals will be transferred automatically to your new bank.

4. CD accounts — CDs are insured separately until the earliest maturity date after the end of the six-month grace period (see Deposits). CDs that mature during the grace period are renewed for the same term and in the same dollar amount unless you close the CD.

5. Checks — Checks will be processed as usual. Checks that haven’t cleared as of the date of the closing will be honored up to your available balance. Your new bank will contact you regarding any changes in the terms of your account. If a retailer refuses to accept your check, contact your branch office.

6. Deposits — Most of the insured deposits are transferred in their entirety to the acquiring bank. A hold may be put on your account if you are the borrower or the guarantor of a delinquent loan. Any account pledged as collateral for a loan will be held. The FDIC will send you a letter explaining how to proceed.

Transferred accounts will be insured separately for at least six months after the merger. This is a grace period to give you time to restructure your accounts if you have an account at the acquiring bank and the combination means you exceed the insurance limit.

7. Insured deposits — The acquiring bank traditionally takes the insured deposits. Interest-bearing deposits continue to accrue interest at the same rate until the acquiring institution notifies you of a change in interest rate.

8. Uninsured deposits — You should never count on the acquiring institution taking uninsured deposits; however, they sometimes do. The FDIC can only transfer all deposits if the premium covers the uninsured amounts. That has happened in about 25 percent of the failures over the past 15 years. So far in 2008, more than 50 percent of the acquiring institutions have taken the uninsured deposits. But don’t count on that trend to continue. Make sure your deposits are insured. Don’t wait until the bank is closed to find out you’re not covered.

9. Brokered deposits — Most often these are CDs that you buy through a broker, such as Fidelity or Schwab. If the bank that’s listed on the CD fails, an acquiring bank probably won’t take them even though FDIC insurance may cover them fully, Barr says.

“Generally, brokered deposits are not turned over to the assuming bank,” Barr says. “There are some assuming banks that have agreed to take brokered deposits. But usually we keep the brokered deposits back in the receivership and we pay those brokers directly. We have to make an insurance determination. We need to obtain documentation from the brokers on their individual clients, who they are and how much of that brokered deposit is their money.

“We have to make sure that no one individual has more than the insured limit in that brokered deposit. So, for example, we have to make sure no one has a $300,000 CD placed at that broker. Secondly, we need the names of the individuals because we must cross-reference those names with the depositor base of the failed institution to make sure the brokered client didn’t also have funds at the bank.

“If the bank closed and you had a $150,000 CD in the bank and then you gave your broker $150,000 to place in a CD and the broker put the money into that same bank, that one client would have $150,000 at the broker, $150,000 at the bank. We’d cross-reference, add those two together and insure only up to $250,000. So $50,000 of the brokered deposit would be uninsured. When we give the money to the broker, we’d keep back $50,000 and then provide a receivership certificate to that client for $50,000 that he or she would use later to obtain any additional money from the liquidation of the receivership.”

10. Dormant accounts — If there has been no activity for 18 months, your account will be turned over to your state as unclaimed property. Visit the Missing Money Web site or contact your state treasurer’s office or your state’s office of unclaimed property for more information on these funds.

11. IRAs — Retirement accounts are transferred in their entirety and insured.

12. Loans — If the acquiring bank doesn’t take over your loan, the FDIC will hold it as it tries to find a buyer. If it succeeds, you’ll be notified. Each loan is reviewed independently to determine the best action for the loan. If you’re in the middle of, for example, a home improvement project and you need additional funding; it would not be unheard of to get it.

“We do, on a case by case basis, provide additional funds to some customers, but we have to take a look at the project,” Barr says. “We’d have to make a determination that if we provided more funds, the value of that loan or the collateral would increase. If we feel that we’d just be throwing good money after bad, then we wouldn’t fund any additional monies to that borrower. There are business decisions like that, that have to be made when the FDIC is running the bank as a conservator or a bridge bank.”

If you want to find another lender and restructure the loan, do so. The FDIC would then release any collateral or transfer the collateral to the new lender.

13. Online servicesOnline banking and bill pay would not be available over the period that the bank is closed, Barr says. A message at the bank’s Web site will explain that the site is temporarily unavailable.

“Online banking and bill pay is taken down over the weekend. We don’t want to have to constantly adjust for all these transactions that are hitting as we’re trying to balance the books. Customers will know they can’t access their online banking or bill pay until Monday when the bank reopens.”

14. Overdraft line of credit — The overdraft line is transferred to the new bank. Contact the bank if there is a problem or if you have questions.

15. Night deposit boxes — You can drop money in them and it will be posted Monday.

16. Safe deposit boxes — The boxes will not be accessible until the lobby reopens Monday.

17. Tax information — The acquiring bank will be responsible for sending you your 1099 tax information. The FDIC will do 1098 reporting.

18. Trust accounts — Accounts will be transferred to the acquiring bank.

The FDIC makes every effort to publish on its Web site a Q&A specific to each bank closing. If your bank fails, check the FDIC Web site frequently for the latest information.

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