What happens when a bank fails?

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Editor’s Note: On Oct. 3, 2008, Congress raised the FDIC and NCUA insurance amount to $250,000. This change has been extended to Dec. 31, 2013.

To say it’s disconcerting to find that your bank has been shut down by authorities is probably an understatement.

We asked David Barr, spokesman for the Federal Deposit Insurance Corp., or FDIC, about the procedure. The FDIC is an independent agency of the federal government. It is charged with insuring deposits in banks and thrift institutions up to $100,000 per depositor in individual accounts and $250,000 in retirement accounts. Deposits held in different categories of ownership may be insured separately.

Bankrate: How do people find out that their bank is being closed?

Barr: The FDIC doesn’t make an announcement until the charting authority revokes the charter, closes the bank and appoints the FDIC as the receiver. Usually, the charting authority — the state, the Comptroller of the Currency or the Office of Thrift Supervision — makes an announcement why the bank was closed and that the FDIC has been named receiver. At that point, we issue a news release announcing that we are going to protect the depositors. So, at least from the government’s standpoint, no prior notice is given that a bank is scheduled to be closed.

Notices are posted on the door; our news release is posted on the door. We get news information to the wire services. Radio stations pick that up, so usually that night word does start to get around. People get home and they can read about it or see it on the news.

Bankrate: What happens after that?

Barr: In most cases, the average customer probably wouldn’t even know that their bank was closed if an announcement wasn’t made. The bank is usually closed on a Friday and reopens on Monday. We had one last year in rural Ohio that closed on a Thursday and reopened Friday morning as a branch of another institution.

Even these days, it hasn’t been difficult to find a buyer to take over the institution. 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. 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.

Bankrate: Do customers of the failed bank have access to their money during the transition?

Barr: Even though the bank is physically closed during the weekend, customers usually have access to their insured funds by check, debit card or ATM card. Typically, when we find a buyer for the bank, checks will continue to clear and can be used up to the insurance limit — the same thing for debit and ATM cards.

Bankrate: What if the FDIC hasn’t found a buyer right away?

Barr: That’s more of a disruptive process. If there’s not a buyer, then ATM and debit cards will not be active and checks that haven’t cleared the system will not clear the system. They’ll be returned, stamped “bank closed.” If we can’t find a buyer, then typically the bank is closed on a Friday and by Monday morning we are mailing checks to the customers for their insured deposits, along with a final statement so they’ll be able to reconcile their checkbooks to see which checks haven’t cleared. If they have checks that haven’t cleared, they’ll have to contact those merchants to make other arrangements.

Bankrate: What happens if people have more money in their deposit accounts than is covered by insurance?

Barr: The uninsured depositor has immediate access to the insured portion. To the extent that they have deposits that exceed the insurance limits, they become a creditor of the failed bank’s receivership. As the FDIC sells the assets of the failed bank, we’ll make periodic payments to the creditors. The good news for the uninsured depositors is that they’re top-tier creditors. The FDIC’s insurance fund is also a top-tier creditor because we are actually a creditor for the insured portion of the deposits. As we sell assets, top-tier creditors have to get fully satisfied before money flows down to other tiers. The amount uninsured depositors receive for their excess funds varies, but I’ve seen it range from 40 (cents) on the dollar to 100 cents on the dollar; on average it’s around 72 (cents on the dollar).

Bankrate: What happens to mortgages, car loans and the like?

Barr: We try to sell as many of the loans to the assuming institution as possible. They leave the dogs, but sometimes they’ll leave us with good loans. If an assuming bank doesn’t make car loans, for instance, they’ll most likely leave those behind with us. Customers should continue to make their payments as usual until notified to do differently.