According to the Wall Street Journal, the Federal Deposit Insurance Corporation (FDIC) now lists 775 banks considered to be in trouble. What if your bank is amongst them? What if your bank fails? What will happen to your money? If the account is insured, how long does it take to get your money?
For the vast majority of people with deposits in one of these banks, there will be very little to worry about. Few banks ever truly fail, that is, close up shop and completely go away. What the FDIC generally does is arrange a sale of the troubled bank and it’s deposits to a more stable, healthy bank. But even if your bank does close, if it was operating under the FDIC, you still have very little to worry about.
There are two types of transactions handled by the FDIC when a bank becomes insolvent:
1. Purchase and Assumption Transaction.
This is the preferred and most common method, where a healthy bank assumes the insured deposits of the failed bank. Insured depositors of the failed bank immediately become depositors of the assuming bank and have access to their insured funds.
2. Deposit Payoff.
When there is no open bank willing to acquire the deposits, the FDIC will pay the depositor directly by check up to the insured balance in each account. These payments usually begin within a few days after the bank closing.
How long before the FDIC reimburses depositors in a Deposit Payoff?
If the FDIC cannot arrange a sale to a healthy bank, Federal law requires the FDIC to make payments of insured deposits “as soon as possible” upon the failure of an insured institution. Though every bank failure is unique, there are standard policies and procedures that the FDIC follows in making deposit insurance payments. It is the FDIC’s goal to make deposit insurance payments within two business day of the failure of the insured institution.
Some deposits may require supplemental documentation from the depositors. The sooner that documentation is provided to the FDIC, the sooner it can make payments!
What about accrued interest on my deposits?
The FDIC’s insurance coverage includes principal and interest through the date of the bank failure up to the applicable insurance limit for each deposit (currently $250,000 for each insurable account). But once the bank is closed, the interest will stop accruing. If the healthy bank acquires your deposits from the failed bank, you will have to establish new interest rates with it. The acquiring bank may change the interest rate on your deposits, but you can withdraw your insured funds without penalty if you so choose. If no acquiring bank is found for the deposits and the FDIC pays the depositors directly for their insured amounts, interest does not accrue past the date of failure.
What happens to my direct deposits if my bank closes?
If the failed bank is acquired, all direct deposits, including any Social Security payments, will automatically be re-directed to the deposit accounts at the acquiring bank.
If there is no acquiring bank, the FDIC typically attempts to find a nearby bank to take over the direct deposit function temporarily, to make Social Security and other government annuity payments available to the customers. Specific information about any changes in the payment of direct deposits will be made available at the office locations of the failed bank.
What happens to checks and automatic payments that have not cleared an account before my bank is closed?
When the failed bank’s deposits are assumed by an open bank, some or all of the offices typically reopen the next business day and there is usually no interruption in the processing of checks drawn on the failed bank. An exception to this procedure may include checks that were drawn against a deposit account that has been determined to be uninsured or an account that the deposit insurance determination is pending.
In a payoff, however, any outstanding transactions or checks presented after the bank has closed cannot be paid or charged against the account. The FDIC needs to freeze all deposit accounts at the time the bank is closed to quickly pay the depositors for the insured deposit balances in their accounts. Any outstanding checks or payment requests presented after the bank failure will be returned unpaid and will be marked to indicate that the bank is closed. This does not reflect on your credit standing. However, it is your responsibility to make other funds available to creditors who receive checks that were returned and did not clear your deposit account because of the bank closing.
Can I continue to use my checks and deposit slips at the new bank?
If there is an acquiring bank, it will accept the checks and deposit slips of the failed bank for a short time. You will receive information about new checks and deposit slips from the acquiring bank. Otherwise, no, you should not continue to use those old checks.
If I have more than $250,000 in a closed bank and I am paid $250,000 by the FDIC, what happens to the amount in excess of $250,000?
If for example, a depositor has only a single account with a balance of $255,000, he or she would be paid $250,000 through FDIC insurance and would receive a claim against the estate of the closed bank for the remaining $5,000 which is not insured. The depositor would be given a Receiver’s Certificate as proof of this claim and would receive payments as the assets of the bank are liquidated.
It is possible to have deposits of more than $250,000 at one insured bank and still be fully insured if the deposits are maintained in different categories of legal ownership.