What Happens to My Money if My Bank Closes Down?

By: Jane McGrath & Kathryn Whitbourne  | 
People walk past a First Republic bank in Manhattan
People walk past a First Republic bank in Manhattan on May 1, 2023, in New York City. JPMorgan Chase is buying most assets of First Republic Bank. The deal, which protects the deposits of First Republic’s customers, comes after the nation’s second-largest bank failure ever. Spencer Platt/Getty Images

Just weeks after Silicon Valley Bank and Signature Bank collapsed in March 2023, federal regulators seized First Republic assets over the weekend of April 29-30, 2023, in what was the second-largest U.S. bank failure. Both Silicon Valley and First Republic were based in San Francisco. First Republic lost a whopping $100 billion in deposits after Silicon Valley Bank failed and First Republic customers feared the same thing could happen to their bank [source: Ensign and Eisen].

If you know how banks work, you know that when you fork over your paycheck, the money doesn't just gather dust in a vault waiting for you to come back and get it. Banks aren't babysitters for your funds — they take the money you deposit and try to make more money with it, which inevitably involves risk. But if all goes well, they only make smart risks. To make a profit, banks invest money and lend it out to people and charge interest on the loans.


The system works — most of the time. The chances of your bank failing are extraordinarily small, but what if the unspeakable happens? Your bank could be making some bad decisions and losing a lot of money right now. The bad news is, before you even know it, much of your money may have already vanished. The good news is that you probably have little reason to worry: You can bank on the United States government to refund at least a substantial portion of your loss.

The government insurance dates back to the 1930s, during the Great Depression. People were terrified about what their banks were doing with their funds. As soon as they heard that the local bank was going under, everyone would rush to try to withdraw as much as they could in what's known as a bank run. Obviously, the bank couldn't possibly return all the money. When bank runs became rampant, President Roosevelt and his New Deal stepped in to try to help. This resulted in the creation of the Federal Deposit Insurance Corporation (FDIC), which insures accounts against bank failure.

Understanding what the FDIC does and how much you can expect back in the event of a bank failure can help you make smarter choices with your funds.


FDIC Bank Closing Procedure: What Happens Now?

If you're a depositor at an FDIC-insured bank, you've got a nice safety net of insurance to fall back on even if your bank goes under. You reap the benefits of insurance even though you haven't spent a penny on premiums. That's because banks pay the premiums for each depositor. These make up the FDIC's deposit insurance fund, which it dips into when it needs to pay back a depositor's loss.

The process goes like this: When a bank fails, the FDIC — which keeps a close eye on how banks are doing — swoops in to take charge of the bank in what's called a conservatorship. Although you won't get advance notice, you'll receive a letter in the mail about the closing after it happens. If all goes well, the FDIC's takeover will go so smoothly that business carries on as usual.


That's because the FDIC is usually able to sell a bank pretty quickly. This entails finding another, healthy bank to assume the failed bank's business. The bank may shut down on Friday and open Monday after the takeover. During this time, you'll most likely still be able to use debit cards, checks and ATMs — at least up to your insured limit. Direct deposits will automatically start routing to your account at the new bank [source: Marquit and Bennett]. You should continue to repay bank loans as usual until further notice.

In the case of First Republic, the FDIC sold most of its operations to another bank, JPMorgan Chase on Monday, May 1, 2023. JPMorgan Chase assumed all of First Republic's deposits (both insured and uninsured) and bought most of its assets. The FDIC and First Republic will share the losses on First Republic's loans. JPMorgan Chase is the largest bank in America. The deal will cost the FDIC's insurance fund billions [source: Ensign and Eisen]

If the FDIC isn't able to find a bank willing to take over the failed one, however, things will go differently. The FDIC will send you a check in the mail for the loss up to the insured limit. Although this will get done as quickly as possible, you may not have access to funds during the interval, which can last a few days. (The FDIC says it aims to make the payments within two business days.) Additionally, you'll eventually get instructions on what to do about your safety deposit box.

Now for the million-dollar question — how much will you get back? The FDIC insures bank accounts up to $250,000 per depositor, per bank. So, if you share a joint account, you'll get half of it back up to the maximum of $250,000 for yourself. It may ease your mind to know that if you have under $250,000 in the failed bank, you'll get all of it back — the FDIC has solid track record of never failing to return a penny of insured funds [source: FDIC]. This insurance covers savings, checking, money market and NOW accounts, as well as CDs. However, it doesn't cover such things as mutual funds, stocks, bonds or life-insurance policies.

If you have more than $250,000 in the bank, you can take measures to insure all of it. One way to do this is to spread your funds across more than one bank — just make sure they are owned by different institutions. You can even maximize how much you have insured at one bank by taking advantage of different ownership categories. For instance, brokerage accounts you have through your bank are insured up to $500,000, through the Securities Investor Protection Corporation [source: Marquit and Bennett].

If you have more money than the insured limit in a failed bank that wasn't taken over by another bank, you can file a claim against the estate of the closed bank for the remaining amount. You would be given a receiver's certificate as proof of this claim, and when the bank assets are liquidated you can hopefully receive payment for the difference, according to the FDIC.


Lose Money If Bank Closes FAQ

What happens to your money if a bank closes?
The Federal Deposit Insurance Corporation (FDIC) insures bank accounts up to $250,000 per depositor for each bank and has a great past record of honouring this policy.
Is money in the bank safe during a recession?
Yes, your money is safe in a bank during a recession. The current system in place ensures that deposits are protected and banks are financially equipped to deal with an economical crisis.
What happened to people's money in their savings accounts during the Great Depression?
The Great Depression forced many banks to close and during that chaos, many people lost money from their savings accounts. After the Depression ended, the FDIC came up with the practice of insuring the savings of bank account holders.
Can a bank lose all your money?
Banks can fail if they stop meeting their obligations or when they face major losses on investments. However, this will never affect your money, as it is insured.

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More Great Links

  • AP. "What if my bank fails? Some questions and answers." MSN Money. July 14th, 2008. (Aug. 15th, 2008) http://news.moneycentral.msn.com/provider/providerarticle.aspx?feed=AP&date =20080714&id=8890587
  • Ensign, Rachel Louise and Eisen, Ben. "First Republic Bank Is Seized, Sold to JPMorgan in Second-Largest U.S. Bank Failure." Wall Street Journal. Mqy 1, 2023 (May 1, 2023) https://www.wsj.com/articles/first-republic-bank-is-seized-sold-to-jpmorgan-in-second-largest-u-s-bank-failure-5cec723
  • FDIC. "Deposit Insurance Coverage Frequently Asked Questions." Federal Deposit Insurance Corporation. Updated May 22, 2006. (Aug. 15, 2008) http://www.fdic.gov/deposit/deposits/deposit/faqs/index.html
  • FDIC. "When a Bank Fails - Facts for Depositors, Creditors, and Borrowers." Federal Deposit Insurance Corporation. Updated 2014. (May 1, 2023) http://www.fdic.gov/consumers/banking/facts/index.html
  • Marquit, Miranda and Bennett, Karen. "What Happens When a Bank Fails?" Bankrate. March 10, 2023 (May 1, 2023) https://www.bankrate.com/banking/what-happens-when-a-bank-fails/