Who gets paid first when a bank goes
Worried about the
slumping stock market, 55-year-old Fran Sweet of Downers Grove,
Ill., decided to put her $500,000 retirement fund into an account
at Superior Bank. It was June 29, 2001.
Less than one month later, the government shut down
Superior Bank, a financial institution allegedly plagued by bad
loans and bad accounting.
While Sweet had no knowledge of Superior's problems,
she did know the Federal Deposit Insurance Corporation would only
insure $100,000 in the event of a bank failure. It didn't concern
her until she showed up at the bank and the doors were locked.
"The day it went into receivership, I went to
the bank to make a deposit. I was stunned to see the FDIC in there,"
"I wasn't concerned about so much money being
uninsured because I thought the problems with the banks had been
fixed in the savings-and-loan shakeout in the 1980s."
The heart-stopping realization that she might not
get back 80 percent of her money sickened Sweet.
"I thought I'd get nothing back except the $100,000."
She wasn't the only one with that sinking feeling.
Uninsured deposit risks
When Superior Bank failed, it had more than $66 million in
We Americans are a trusting bunch when it comes to
our banks. Approximately 370 banks went belly up from 1992 through
2001. At the time they folded, those institutions had a total of
more than $673 million in uninsured deposits, according to FDIC
"A lot of depositors realize they have uninsured
money and they're just playing the odds that their bank isn't going
to fail," says FDIC spokesman David Barr.
"They want their funds all in one bank. There
are about 9,500 FDIC insured institutions. Ten failed this year,
so the odds are in your favor.
"A lot of the uninsured are municipal governments,
school districts, and churches."
While it's never a good idea to have uninsured money
in a bank, depositors -- both insured and uninsured -- are at the
top of the totem pole when it comes to receiving money after a bank
failure. Disbursements are made on a periodic basis as assets are
sold. The FDIC has been able to return, on average, 73 percent of
uninsured deposits to customers.
But you can be separated from your money for a long
"It can take years for uninsured deposits to
be paid," says Barr.
"Universal Federal failed in June 2002, and the
uninsured depositors have received 90 percent of their money back.
But if you go back to Sinclair National Bank, which failed in September
2001, those uninsureds have received only 9.7 percent so far. It
depends on the assets."
Typically, there are a couple of scenarios when a
bank fails. If the FDIC finds someone to buy the bank, the bank
is up and running the next business day, checks clear and ATMs spit
But the buyer decides whether to purchase the uninsured
deposits. More often than not, they don't. The uninsured deposits
go into receivership and customers get a receivership ticket for
their claim. Any money the FDIC can recover goes toward claims.
"If we don't find a buyer, the FDIC typically
closes the bank on a Friday and checks are in the mail by Monday
for insured deposits," according to Barr.
"There will be a couple of days over the weekend
where customers don't have access to their funds. The ATMs go offline
and checks that haven't cleared by Friday afternoon are returned."
The FDIC then liquidates the bank's assets and uses
the money to repay uninsured deposits.
Equal in the eyes of the FDIC
If you're the little old lady from Pasadena with $10,000 in
uninsured deposits, you needn't worry about fat cat XYZ Corporation
with $10 million in uninsured deposits muscling you to the back
of the line when the FDIC starts handing out money.
"All uninsured depositors, whether governments,
school districts, businesses or individual consumers, are treated
equally," Barr explains.
"All creditors get a receivership ticket. The
FDIC pays a percentage of it. So, if you have $1,000 in uninsured
deposits and the FDIC has enough money to pay everyone 25 percent,
you get $250. Someone who has $1 million in uninsured deposits would
Depositors also receive post-insolvency interest on
uninsured money returned by the FDIC.
When a bank closes, FDIC representatives usually spend
a couple weeks at the bank or a nearby location setting up appointments
to meet with uninsured depositors face-to-face.
"People are angry initially. They calm down as
they talk with FDIC claim reps," says Barr. "We explain
the claims process and how it works. That helps, but it's when checks
start showing up in the mail -- actions speak louder than words.
But there is uncertainty when a bank closes."
Depositors who are unable to meet with FDIC claim
reps are sent a letter explaining the process and listing the amount
the FDIC believes the customer has in insured and uninsured deposits.
To date, Fran Sweet has received 52 percent of her
uninsured deposits. While she's glad to have gotten back some money,
she's says she's still very angry and worried she won't get it all.
"The FDIC is very bad at communicating with people
who have lost money. You just get a check in the mailbox. None of
us have any idea of what we can expect. The amount of the first
check was significant. The second was about half and the third was
about half of that.
"I want all my money back. What happened at Superior
was the same as at Enron and WorldCom. But you expect more from
a bank. You don't expect putting your money in a bank to be a gamble."
Barr says the FDIC doesn't send out notices
as to when checks will be arriving because it wants to keep costs
"Instead of sending out a notice that you'll
be receiving a check, we just send the check. We don't try to make
any predictions of how much we are going to recoup because if we
don't hit those goals we don't want people coming to us saying,
'You said we would get 85 percent back, we got 60 percent, what
"The checks will continue to dwindle in as money
funnels down through the receivership. Then, a notification will
go out when all the assets are sold that no more money will be distributed."
If you plan on keeping more than $100,000 in a bank, there
are ways to divide the money so that more of it is covered by deposit
insurance. This won't work if all the money must be kept in one
account such as an IRA.
The FDIC says deposits maintained in different categories
of legal ownership are separately insured. The most common categories
of ownership are individual, joint, retirement, and pay-on-death.
Here's an example of how a husband and wife could
have $800,000 fully insured at one bank.
- Husband and wife each have $100,000 in individual
- They have $200,000 in a joint account.
- Each has $100,000 in retirement accounts.
- Each set up a $100,000 revocable trust account,
payable on death, naming each other as beneficiaries.
In addition, they could set up as many revocable trusts
as they want for other qualified beneficiaries: parents, siblings,
children, grandchildren. Each beneficiary account would be insured
up to $100,000. Nieces, nephews, aunts and uncles are not qualified
While you may have a living trust account, there is
no ownership category called living trust. If a bank fails, the
FDIC will look at a particular living trust account and decide whether
it's an individual, joint or pay-on-death account.
"A living trust often voids the extra insurance.
A lot of them have qualifying events or contingencies," says
"Say you set up a trust for your three children
and you have $300,000. It would be fully insured but then you have
some contingency that has to be satisfied. The children have to
graduate from college before the money gets turned over to them.
That puts into question whether the child really is the beneficiary
of your money. We don't know if your children will graduate and
we can't wait, the money has to be handed out now."
If you want to set up a pay-on-death account, keep
it simple; if you die the money goes to a designated beneficiary.
If the bank fails, the FDIC will honor that and fully insure the
Keep in mind that dividing your money among different
branches of the same bank won't give you increased coverage. The
main office and all its branches are considered one bank. If you
have more than $100,000 in IRA money you'll need to divide it among
two or more financial institutions.
Some customers of failed banks say their institution
never told them to divide money into different accounts so that
it's fully insured. Others say bank personnel gave them bad advice
and that despite setting up the accounts as told, they later learned
their money wasn't insured.
Unfair as it may seem, the FDIC says the responsibility
for correctly setting up the accounts rests on the depositor's shoulders.
The FDIC advises talking with a bank representative
about setting up accounts, but then double-check the plan before
depositing any money.
Ask your bank for a copy of the FDIC booklet "Your
Insured Deposit." You can also find the booklet on the FDIC
When you think you have a properly structured plan,
call the FDIC consumer hotline at (877) 275-3342 and check it with
Don't be caught off guard by a bank that's on
shaky ground financially. Bankrate.com's Safe
& Sound rating feature lets you see the financial condition
of banks, thrifts and credit unions. Check out your bank and make
sure it's keeping your money safe and sound.
-- Posted: Jan. 3, 2003