Here’s what happens when your bank fails

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The fallout from COVID-19 is sending serious signals of distress throughout the economy: millions of individuals filing for unemployment and struggling to pay rent, business owners closing their doors and major retailers filing for bankruptcy. With so many segments of the financial ecosystem struggling, will we start to see a wave of bank failures similar to the last recession? Between 2008 and 2013, nearly 500 banks in the U.S. failed, but account holders at those banks could breathe a $250,000 sigh of relief, thanks to the protection of the Federal Deposit Insurance Corporation (FDIC).

So far, 2020 does not feel anywhere close to those doomsdays. In fact, only two banks – Ericson State Bank in Nebraska and The First State Bank in West Virginia – have shut their doors this year. But what if that number increases? What happens if your bank fails?

What is FDIC insurance?

You may feel fairly confident about the safety of the cash in your bank accounts today, but you would have had serious doubts about that money in the 1930s. Banks were failing left and right during The Great Depression (4,000 suspended operations in 1933 alone), and people watched some of their money disappear when they shut their doors. To restore faith in the banking system, Congress passed The Banking Act, which created the FDIC and offered account holders the reassurance that their money would be safe if their bank failed.

FDIC insurance limits

Today, FDIC insurance guarantees $250,000 for each depositor at each FDIC-insured institution in any of these categories: checking accounts, savings accounts, money market accounts and certificates of deposit. The insurance does not protect money in stocks, bonds, mutual funds, life insurance policies, annuities or securities. Want to know how much of your money is protected by FDIC insurance? Use its Electronic Deposit Insurance Estimator tool.

Single accounts

Let’s say you have three accounts open at your bank with $150,000 in your savings account, $25,000 in your checking account and $75,000 in a CD. All the accounts are listed in your name with no one else on the account, so these all fall under your single account. You have $250,000 in the bank, and all of it is protected by FDIC insurance coverage.

If you have more than $250,000, you can explore other options to keep it covered under the FDIC. For example, you can keep $250,000 at one bank and deposit additional funds at other banks that are also members of the FDIC. Be sure to use the FDIC’s BankFind tool to verify that an institution is covered by the insurance. You can also open other types of accounts like an IRA and a revocable trust account.

Joint accounts

If you have a joint account with your partner at the same bank, you can enjoy more protection from the FDIC. For example, consider the fictional couple, Larry and Sally Jones with $550,000 in the bank.

Account owners Account type Account balance
Larry and Sally Jones Savings $250,000
Larry and Sally Jones 3-year CD $300,000

The FDIC assigns 50 percent ownership to each person in the joint account. Larry and Sally each have $125,000 of FDIC insurance on the savings account, and they each have $150,000 on their CD account. This means that each of them has $25,000 that does not qualify for insurance in their joint accounts. However, if each of them has an individual account in their respective names, each of those accounts enjoys another $250,000 worth of protection. So, they should transfer some of those funds to keep them safe.

What happens after a bank failure?

There’s nothing to know about the “before” time frame of a bank failure because you won’t receive any heads-up warning that your bank is about to close. Instead, the FDIC works behind the scenes, handling the details and working to find an acquiring bank. For example, when Ericson State Bank failed in February, Farmers and Merchants Bank (also located in Nebraska) assumed all of Ericson’s deposits. The original Ericson location reopened four days later as a Farmers and Merchants Bank branch. This is typically what happens if a bank fails: Another bank with a better balance sheet takes it over.

“The FDIC notifies each depositor in writing using the depositor’s address on record with the bank,” says LaJuan Williams-Young, a spokesperson for the FDIC. “This notification is mailed immediately after the bank closes. Every effort also is made to inform the public through the news media and notices posted at the bank.”

If you receive a phone call from someone claiming to be with the FDIC, hang up. Williams-Young says the FDIC never contacts depositors by phone. However, you can call the FDIC with questions. Look at the FDIC’s list of failed banks for specific information on individual failures and appropriate contact numbers.

How do you get your money back in a bank failure?

In most bank failures, you don’t have to do anything to get your money back. You can use your account as you did previously, but it will be at a new bank. If you have direct deposits routed to your account, the FDIC will reroute them to the acquiring bank. You can also continue to use your existing checks for a short period of time, but the acquiring bank will contact you with information about new checks.

What if the FDIC struggles in its matchmaking efforts and fails to find an acquiring bank? The FDIC gets out its checkbook.

“If the FDIC was unable to find an acquirer for the failed bank’s deposits, the FDIC conducts a deposit payoff,” Williams-Young says. “In such a case, a determination is made of the amount of FDIC deposit insurance coverage for each depositor. The FDIC assesses the amount in each deposit account at the time of the bank closing, determines whether the accounts are within the deposit insurance limits and pays the depositor with a check for the insured amount.”

How long will it take to get your money? While the FDIC says that each bank failure is a unique situation, the goal is to make deposit insurance funds available within two business days of the failure.

What happens if you have your money at a credit union that fails? You’re covered, too. Learn more about the National Credit Union Administration, the credit union industry’s equivalent to the FDIC.

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