Don’t panic! Your bank is probably not going to fail. Still, many people worry about what would happen to them and their savings if their bank went under. This fear is not entirely unfounded. The economic tide is decidedly low, and the number of banks on the FDIC “at risk” list has more than doubled since this time last year (it now stands at 775, up from 302). This article explains how to tell if your bank is going to fail and what happens to your money if it does.
How Can You Tell if your Bank is about to Go Under?
There is no foolproof way to predict bank failure. Most of the banks on the FDIC risk list (which is kept secret to prevent the proverbial “run on the bank”) don’t fail. One of the simplest things to do is to stay aware. Watch the news. Before Washington Mutual failed in 2008, there were rampant rumors that the bank was in trouble.
In addition to being conscious of the rumor mill, you can also keep your eye on independent reports. There are numerous consulting companies that assess the risk of banks on a regular basis. One such report is the IRA (Institutional Risk Analytics) Bank Industry Stress Index. This uses the FDIC’s data and some of the factors include loan defaults, lending capacity, and capital.
Other reports include the Bankrate Report and the Fitch Ratings Report, but you can shop around for your own.
What Happens when a Bank Fails?
The FDIC (Federal Deposit Insurance Corporation) is a government establishment that guarantees the safety of bank deposits. When a bank fails, the FDIC does one of two things. More commonly (and ideally) the failed bank’s insured deposits are absorbed by a healthy bank. When this occurs, the former depositors of the failed bank can immediately access their funds from the healthy bank.
Alternatively, when no healthy bank acquires the failed bank, the FDIC will send a check of the insured balance directly to the depositor within a week of the failed bank’s closure. According to the FDIC website, since the creation of the deposit insurance program in 1934, no consumer has ever lost as much as a penny of insured funds as a consequence of bank failure.
How do you Know if your Bank Deposits are Insured?
Not only must your bank be insured by the FDIC for your deposits to be covered by their insurance, but your account must be the type they insure. Most banks (and all major ones) are insured by the FDIC. It would be very difficult for a bank to compete without being insured; however, there are banks that are not. To find out if your bank is insured, see the FDIC website’s insured bank search.
As mentioned above, only certain types of accounts are covered by the FDIC. These include all deposit accounts: checking and savings, money market deposit accounts, IRAs (individual retirement accounts) and certificates of deposit. These accounts are insured by the FDIC for up to $250,000. The financial reform bill recently passed in July 2010 made the $250,000 coverage permanent, and not subject to a reduction in 2014, as it had been.
The types of accounts not covered by the FDIC are not traditional deposit accounts. These include other services a bank may offer, such as stocks, bonds, mutual funds shares, insurance policies, annuities or securities.
What Can You Do if your Bank Fails?
Mostly, sit back and wait. Your deposits will either be assumed by a new bank (you may not even have to find a new ATM) or you will be paid by the FDIC. If the amount in your account totals more than $250,000, you will only have access to the $250,000 covered by the depositor’s insurance, but you will still have a claim against the estate of the closed bank for the amount above the insurance cap. In that situation, you will automatically get a Receiver’s Certificate, and payments will be made as the bank assets are liquidated.
How to Protect Yourself
It is extremely important that your bank be insured. In addition, make sure that your accounts don’t have more than $250,000 in them, and that you don’t have multiple accounts at one bank totaling more than $250,000. If you have more than one account at a bank totaling more than the cap but the accounts have different types of legal ownership, they may each be insured for the full amount (individual accounts, joint accounts, and trust accounts are all different types of ownership). You should make sure your accounts are covered by going to the FDIC’s deposit insurance estimator.
For more information, see the FDIC’s deposit insurance summary, and their fact sheet for what happens when a bank fails.