Does the name IndyMac make you cringe a little? If so, you're not alone. After several bank failures already the same year, news broke in the summer of 2008 that IndyMac bank was having trouble. As a result, its customers became concerned about the fate of their funds. When they started lining up outside the bank in a desperate attempt to get their money back, the story struck a chord with other people, who started to worry about what would happen if their own bank failed.
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, what about when 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 easily 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. You may even read about it in the newspaper. 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 [source: Bruce]. Direct deposits will automatically start routing to your account at the new bank. You should continue to repay bank loans as usual until further notice.
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. Also, 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 $100,000 per depositor, per bank. So, if you share a joint account, you'll get half of it back up to the maximum of $100,000 for yourself. It may ease your mind to know that if you have under $100,000 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 a hundred grand 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, IRAs are insured up to $250,000. But even if you didn't take the time to insure all of your bank funds, the FDIC goes the extra mile and tries to refund even uninsured funds. Although it can't always return all of your money, on average it returns 72 cents on the dollar [Bruce].
If you still have questions about what is or isn't insured, visit the FDIC estimator link on the next page.
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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
- Bruce, Laura. "What happens when a bank fails?" Bankrate.com. Updated July 14th, 2008. (Aug. 15, 2008) http://www.bankrate.com/brm/news/chk/20080509-bank-failures-Q-and-A-a1.asp
- 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 July 17th, 2008. (Aug. 15, 2008) http://www.fdic.gov/consumers/banking/facts/index.html