Do you know what to do if your bank fails?
The sudden implosion of Silicon Valley Bank and Signature Bank has millions of once-complacent asking this question. The truth is, banks can and do fail, often without any prior outward signs of trouble. Hundreds of banks went out of business during the savings and loan crisis of the late 1980s and early 1990s, and hundreds more failed during the Great Financial Crisis of the late 2000s.
The good news is that your money doesn’t automatically evaporate when your bank fails. At least, not all of it, and not right away. But you may have to take action quickly to minimize the financial fallout.
What to Do if Your Bank Fails — Bank Failure Checklist
You probably won’t know your bank is in trouble until the bottom falls out. They keep it that way to avoid spooking investors and customers. So when you find out there’s a problem, it’s tempting to jump and run to the bank to pull out all your cash. Instead, follow these step-by-step Instructions.
1. Check Your FDIC Coverage
First things first: Are your bank deposits covered by FDIC insurance? Most accounts at traditional banks, large or small, are FDIC-insured, so your money is safe even if the institution shuts down. If you’re not sure whether your bank has FDIC insurance, look for the “member FDIC” logo on their website or branch.
The FDIC’s deposit insurance fund covers your first $250,000 in deposits per ownership type. Basically, that means the FDIC only guarantees up to $250,000 per bank across all accounts, including checking, savings, CDs, and other deposit account types. You can get around this limit without opening accounts at multiple banks by using different ownership types, such as:
- Joint ownership, generally with a spouse or domestic partner
- Trust accounts, which cost more to set up but have other financial benefits for people with significant assets
- Custodial accounts for minors (UTMA/UGMA)
At some point, it’s easier just to open accounts at different banks. But this is a moot point when your immediate concern is your primary bank’s failure.
Anyway, under FDIC rules, your bank will keep operating normally until it transfers its assets to a purchasing bank or the FDIC opens what’s known as a “successor bank” to hold its assets if it can’t find a buyer. This happens quickly, and there’s no reason to attempt to withdraw your FDIC-insured funds and switch banks.
If you have cash or assets in an account that isn’t FDIC-insured, such as a taxable brokerage account, or your cumulative deposits exceed the $250,000 insurance limit, then you’ll need to go to the next step: get a receiver’s claim.
2. File a Receiver’s Claim
A receiver’s claim (technically, a receiver’s certificate) is essentially a claim that the bank owes you money. The tables turn, and now they’re the ones in debt to you. Your claim will be one of many that individuals and businesses file against the bank when it goes under or gets bought out.
As the bank’s assets are liquidated, they’ll send you payments toward the total amount they owe you. It might be slow — potentially taking months or even years — and you may not get back every dollar.
This slow, unsatisfying process is better than nothing, and there’s a good chance you’ll get much of your uninsured cash back. Still, it’s a reminder of the importance of keeping your cash and assets in accounts with FDIC insurance, staying below the deposit insurance limit whenever possible, and using more than one FDIC-insured bank if necessary.
3. Keep Using Your Account(s) as Usual
Banks go out of business, but they don’t just go away. You’ll still have access to your money, though with some restrictions. Thanks to the FDIC, your bank can’t just chain its doors and lock you out.
Instead, the government steps in and runs the bank as if nothing had ever happened. Your checks won’t bounce. Your ATM card will still provide access to cash. Everything still functions under the FDIC’s direction.
There’s no need to withdraw your funds from the bank in a panic. In fact, if enough account holders try to do this at once, it can lead to a run on the bank and jeopardize the FDIC’s attempts to wind down the bank in an orderly fashion.
4. Meet Your New Bank (& Bank Products)
When a bank is going under and the FDIC seizes control, they usually have another bank lined up to purchase and take over the failing bank’s assets. If they can’t find a buyer, the FDIC will close the bank and pay out the losses covered by deposit insurance.
There’s no specific deadline by which you’re guaranteed to get your money, but the FDIC says it strives to pay out insured deposits within 2 business days.
This leaves you (hopefully) with only a short period of time without access to your money. A 2-business-day gap can be a challenge, especially if bills are due and your paycheck is stuck in the bank, but at least you don’t need a month’s worth of cash on hand (or to dip into your emergency fund).
If a new bank purchases your now-defunct institution, you’ll follow some simple guidelines depending on which products you held. If the FDIC can’t find a buyer for the entire failed bank, your deposit accounts in particular may stay with the successor institution, which will essentially be a slimmed-down version of the failed bank. But the guidelines remain the same.
A failed bank’s loan products are very valuable to other banks, so another business will quickly buy up your loan and send you new paperwork and instructions on where to send your payments.
In the meantime, you must keep up with your payments for any loans or lines of credit that you have with the bank. Bank failure isn’t an excuse for missing payments. You’ll just owe the money to a new lender, which will assess late fees and penalties incurred during the transition.
When a new bank takes over your account, read the fine print on their account agreements for deposit products like checking and savings accounts. You’ll probably have a new fee structure and maybe even new account minimums. If the new policies are too restrictive or expensive, you can move your funds to a different account type or find a new bank.
What happens to your direct deposits like your paycheck or social security payments? Since these are of critical nature, the FDIC will immediately appoint a new bank to temporarily accept these payments. You may get an update in the mail, but the best way to get this information is at your local bank branch. It’s the one time it’ll actually be worth going to your bank in person after the failure.
Bank Failure FAQs
Finding out your bank has failed won’t warm your heart, but the good news is that you’re very unlikely to lose FDIC-insured funds. And dealing with the fallout is straightforward enough — the FDIC does most of the hard work.
Still, it’s reasonable to have questions about why and how you got to this point, and what comes next. We’ve answered the most common questions here.
How Do Banks Fail?
Banks fail when they become insolvent, when they don’t have enough cash to process withdrawal requests, or a combination of both.
A bank becomes insolvent when the value of its liabilities (what it owes to deposit customers who have money in the bank) exceeds the value of its assets (the money it lends out to borrowers and the securities it buys with deposited funds). Insolvency doesn’t automatically cause the bank to fail, but it increases pressure on the bank and makes failure more likely.
A more acute situation occurs when a bank doesn’t have enough money to process withdrawal requests. This is known as a liquidity crisis. It’s often preceded by a bank run, where deposit customers try to withdraw cash while they still can.
In a bank run, the bank eventually runs out of money and can’t process withdrawals. The FDIC steps in at this point (or before) to keep the situation from getting even worse. This is what happened to Silicon Valley Bank — in the 24 hours before the FDIC seized its assets, customers withdrew some $42 billion.
Solvency and liquidity crises often feed on each other. In Silicon Valley Bank’s case, rising interest rates steadily eroded the value of its liquid assets, which were heavily invested in low-yield bonds. Meanwhile, deposit customers with exposure to the struggling tech and venture capital industries drained their accounts, leaving the bank with even less cash on hand.
To maintain solvency, Silicon Valley Bank’s leaders had no choice but to sell their bonds at a loss and try to raise capital through a share sale. This caused already-nervous customers to panic and attempt to withdraw their remaining deposits, sparking a full-blown run that killed the bank.
What Happens When a Bank Fails?
State or federal banking regulators seize the bank’s assets and transfer them to the FDIC. The entity doing the initial seizure depends on whether the bank is state- or federally chartered, but that’s more of a technical distinction. The end result is the same: within hours, the FDIC controls the bank.
Once the FDIC is in control, it replaces the bank’s senior management and begins looking for a buyer for the bank’s assets. Ideal candidates are larger, financially sound banks, so this is more difficult for bigger failed banks.
If the FDIC can’t find a buyer for the entire bank, it goes to plan B: liquidate the bank’s assets by selling them off in pieces. This is what happened with Silicon Valley Bank, which was one of the 20 biggest banks in the U.S. when it collapsed. Even massive international banks like JPMorgan Chase and Wells Fargo passed on buying Silicon Valley Bank due to uncertainty about the health of its balance sheet, so the FDIC created a more permanent successor institution that immediately began trying to attract deposits from former customers.
If the FDIC can find a buyer for the failed bank, customers’ loans and deposits transfer over and business continues pretty much as usual. If it can’t, the FDIC transfers what it can to willing banks and pays out everything else on an individual basis.
What Banks Are Most Likely to Fail?
Smaller, under-capitalized banks are more likely to fail. But as we saw with Silicon Valley Bank and Signature Bank, huge banks can go under as well. It all depends on the strength of their balance sheets and customers’ faith in their ability to make good on deposits.
What Banks Are Least Likely to Fail?
The biggest banks in the U.S. are the least likely to fail. Not because they’re necessarily the strongest, but because the U.S. government literally deem them “too big to fail.”
The list of “too big to fail” banks is a short one, but it includes household names like:
- JPMorgan Chase
- Bank of America
- Wells Fargo
- U.S. Bank
Silicon Valley Bank wasn’t technically on this list, but by guaranteeing all deposits — even those over the $250,000 insurance limit — the FDIC implicitly designated it as such.
How Long Does It Take to Get Your Money When Your Bank Fails?
The FDIC makes every effort to pay out insured deposits within 2 business days of taking over the bank. In some cases, it may take longer. However, if the FDIC finds a buyer for the failed bank, accounts transfer more or less seamlessly and there’s virtually no gap in funds availability.
What Happens to Your Direct Deposits When Your Bank Fails?
If another bank buys the failed bank, your direct deposit instructions should transfer to your new bank. If the FDIC can’t find a buyer, it tries to find another bank to temporarily take responsibility for processing direct deposits and holding your funds. In that case, you might need to inform your employer about the change.
What Happens If You Have More Than $250,000 in an Account at a Failed Bank?
The FDIC only guarantees up to $250,000 per legal ownership type, per bank. If you have more than that in a failed bank, you could lose some or all of the balance above the $250,000 limit.
That said, the FDIC makes every effort to recover as much as possible for depositors by selling the bank’s assets. You might get everything back, or you might take only a small haircut. And in the wake of Silicon Valley Bank’s collapse, President Joe Biden publicly assured Americans that “your deposits will be there when you need them,” which is somewhat ambiguous but seems to suggest that the FDIC will provide a de facto blanket guarantee for all deposits in FDIC member banks moving forward.
Can the FDIC Fail?
Anything can happen, so we can’t say with certainty that the FDIC can’t fail. However, the FDIC has demonstrated remarkable resilience over the course of its nearly 100-year history. It would take some sort of geopolitical catastrophe, possibly precipitated by a U.S. debt default that ends the dollar’s status as the world’s reserve currency, to lay the groundwork for the FDIC’s collapse.
After the Great Depression, the FDIC’s two most serious tests were the savings and loan crisis of the late 1980s and the Great Financial Crisis of the late 2000s. The FDIC liquidated hundreds of banks during those episodes without running out of money.
Though the Great Financial Crisis saw banks bailed out by Congress to the tune of hundreds of billions of dollars, the FDIC funded its work through special assessments on member banks. It only ran a deficit for a few years before those assessments put it back in the black, where it remains today.
The best way to get through the ordeal of a failure is to avoid problems in the first place. Which, for starters, means banking with FDIC-insured institutions only. And if you’re approaching the maximum for FDIC coverage, open a new account with another insured institution so you’ll be confident in your coverage.
If you’re a little scared right now and you’re curious about how your bank is doing, take a look at your bank’s financial reports. If your bank is publicly traded, you can find them for free on websites like CNBC and Yahoo! Finance. Banks generally try to put on a brave face in publuic statements, but if you see concerning liabilities on the balance sheet or consistent losses, perhaps it’s time to find a new financial institution.