Defend yourself against failing banks |
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What happens after a failure
To be sure, the highly publicized mess outside IndyMac after the failure was announced showed that the ensuing process doesn't
always go as smoothly as officials would like. Typically, the bank's regulator announces the closing and appoints the FDIC as
receiver.
The FDIC goes on scene and, usually, shuts the bank on a Friday and reopens it by the following Monday. Even in
times such as this, it hasn't been difficult to find buyers to take over most institutions since they're often only taking the
insured deposits. (For more specific information on what happens after a bank failure, read a
Q&A with the FDIC's David Barr.)
"The FDIC can carve out all the problem loans and other assets of the bank and just pass a clean institution to
the acquiring bank," says FDIC's Barr. "Even if all they want are the branches, then they just take the insured deposits and they
get an instant bank. Many times they'll take the front-line employees too.
"We try to market the liabilities as quickly as possible. The FDIC is not a financial institution; we're a
liquidator. If they are marketable loans that could easily be sold on the secondary market, we'll try to sell those. If they're
troubled loans, then we work with the customers to get them to perform.
"The good news for the taxpayer is that this costs them nothing since the FDIC is funded by charging banks premiums
for deposit insurance. Now, if we run out of money, then the full faith and credit of the United States stands behind our insurance
fund. Luckily, the FDIC hasn't had to go there, but if you remember back in the 1980s, the insurance fund for (savings and loan
associations) actually went out of business and it cost the taxpayers $150 billion."
While insured deposits are covered 100 percent in
the event a bank fails, Barr says that over the past 15 years, uninsured
depositors have received an average of 72 cents on the dollar for
the portion of their funds that exceeded the insurance limit. There
have been instances where uninsured depositors received 100 percent
of their money, but others have received much less, as was the case
with the Oakwood Deposit Bank in Ohio in 2002, where uninsured depositors
received just 42 percent. While you may recover your uninsured deposits,
it can take a long time, even years. On the other hand, insured
deposits are paid very quickly, usually within 48 hours.
There are several ways to insure more than $100,000 at a single bank. Read
"Are your deposits insured?" for tips on making the most of FDIC coverage.
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