What do you mean my bank can fail? Yes, even the well-trained managers at your seemingly secure bank can make poor business decisions. Plenty of people thought it was impossible, but banks do make mistakes – like the numerous bad loans that eventually crushed major financial institutions in the past few years.
If you weren’t around for the savings and loan crisis and the scandals of the 1980s and 1990s, the recent vulnerability of banks might have been an unwelcome surprise. If your bank is in trouble, don’t panic. As with any extreme situation, overreacting just makes things worse. Stay calm, get your wits about you, and think about these smart next steps. You’ll stay on track, even if your bank is falling apart.
Bank Failure Checklist – What to Do
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. The FDIC’s deposit insurance covers your first $250,000 in deposits. Under FDIC rules, your bank will keep operating normally until it transfers its assets to a purchasing bank. You’ll have time to withdraw your funds and switch banks without risk.
If you managed to find one of the rare non-insured accounts, then you can make a better case for panicking. But you’re not completely without recourse. If you don’t have deposit insurance then you’ll need to get a receiver’s claim.
2. File a Receiver’s Claim
If you don’t have FDIC insurance, or if you have more than the $250,000 that deposit insurance usually covers, you’ll have some extra work to do to recover your cash. A receiver’s claim 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 will 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, and you may not get back every dollar, but it’s your chance to recover your cash. Most importantly, take the warning now: You’re better off using banks with FDIC insurance and staying below the deposit insurance limit (using more than one bank if necessary).
3. Remember You Can Still Access Your Funds
Banks go out of business, but they don’t just go away. You’ll still have access to your money – though with some restrictions – and your checks will still go through. 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. Don’t be one of the frightened and misinformed account holders crowding the parking lot and worrying about what’s going inside. There’s not going to be a “run on the bank” scenario like the one the U.S. saw in the late 1920s and early 1930s.
4. Meet Your New Bank
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 internal FDIC guidelines have the agency aiming to get you a check within two days. That leaves you (hopefully) with only a short period of time without access to your money. Those two days 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.
If a new bank purchases your now-defunct institution, you’ll follow some simple steps depending on which products you held:
- For Loan Products: 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. 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. They will charge late fees and penalties even during the transition, so keep on paying as if your bank never failed.
- For Deposit Products: 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.
- For Automatic Deposits: 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.
The best way to get through the ordeal of a failure is to avoid problems in the first place. Do you banking with safe institutions only. Ideally, you’ll find one that’s safe enough to stay in business, but since you can’t always predict mistakes, at least make sure that you choose a bank that is insured by the FDIC. 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 health rating. Steer clear of banks near the lower end of the scale, and you’ll be less likely to find yourself – and your bank – in trouble.
Have you dealt with a bank that went out of business and got bought up by another bank? What happened to your cash, and how did you get through the ordeal?