Although the flood of bank failures has slowed somewhat since the financial crisis, the FDIC has still been forced to shut down 120 banks already in 2011. Thanks to the FDIC, account holders whose deposits totaled less than $250,000 at those banks didn't lose a dime. But the safety and soundness of a bank is still important; even with FDIC insurance, a bank failure isn't entirely painless for account holders.
Basically, when a bank fails, the FDIC takes it over and resolves it, liquidating its assets to reconcile its liabilities as best it can. During that process, they attempt to find a buyer. If another institution steps up to buy the failed bank, the likelihood of disruption in the availability of funds or the functioning of ATM and debit cards is lower. An acquisition also means even account holders who exceed the FDIC's $250,000 limit likely won't lose money. But, going forward, account holders may end up earning a return on their money significantly lower than they originally signed up for.
However, if no other bank steps up to buy the failed institution, account holders may have to deal with some minor disruptions in the availability of their funds, bill pay and debit card functioning. Merchants may also be reluctant to accept checks from the failed institution.
For those with deposits totaling more than $250,000, things can get significantly dicier. Getting excess deposits back can mean getting in line with all the other account holders in the same boat as you.
One way to avoid these hassles is to research a bank's safety and soundness before entrusting your savings with it. Fortunately, Bankrate offers a free service to do just that: Safe & Sound Star Ratings, which rate banks, thrifts and credit unions on a five-point scale based on the performance of their assets and other factors. To help them stay as accurate as possible, Safe & Sound ratings are updated four times per year -- most recently today -- so check them out.