What Happens When Your Bank Fails | CreditShout

What Happens When Your Bank Fails

By Kevin / March 17, 2009


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Nearly two decades have passed since the savings and loan crisis took out more than 1,000 financial institutions at a cost to taxpayers of $125 billion. A lot of people are worried about their banks these days. While devastated giants like Citigroup get bailed out again and again and again, many smaller banks are failing. The federal agency that takes over unsound banks is the Federal Deposit Insurance Corporation – the same people who guarantee depositors will not lose their money. Most every Friday night now the FDIC seizes several banks. You have not seen these takeovers happening because they are done secretly at night to make sure there is no needless panic by depositors.

While it is unlikely the nation will see thousands of banks fail as they did during the savings and loan industry collapse in the late 1980s and early ’90s, analysts predict there will be more battered financial institutions that are unable to survive in today’s marketplace. A staggering 26 banks failed in 2008 and six more have failed through January of 2009. The list includes Washington Mutual, by far the largest institution ever to fail.

The FDIC’s list of “problem” institutions jumped to 171 at the end of September 2008 (the latest total was released Nov. 25), compared with 117 at the end of June. The agency does not release the names of banks it worries about, fearing such disclosure will contribute to bank runs, but said assets held by the troubled banks swelled from $78 billion to $116 billion. Bank analysts predict dozens and perhaps hundreds more failures are to come, driven by bad mortgage loans, falling home prices, the credit crunch and a flagging economy.

How can I make sure my money is safe?

All deposits accounts worth $100,000 and less are automatically insured by the FDIC. Many retirement accounts, such as IRAs and 401(k)s, are insured to $250,000 per person. But since it is a person’s aggregate deposits, and their not individual accounts, that are insured, any amounts over $100,000 deposited at any one bank are not covered. While keeping more than the limit at any bank means taking a chance, the risks can be bigger with smaller companies, provided they are heavily exposed to mortgage and other debt during the current downturn.

How does the FDIC resolve a closed bank?

In the event of a bank failure, the FDIC acts quickly to protect insured depositors by arranging a sale to a healthy bank, or by paying depositors directly for their deposit accounts to the insured limit.

Purchase and Assumption Transaction. This is the preferred and most common method, under which 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. The assuming bank may also purchase loans and other assets of the failed bank.

Deposit Payoff. When there is no open bank acquirer for the deposits, the FDIC will pay the depositor directly by check up to the insured balance in each account. Such payments usually begin within a few days after the bank closing.

When can I expect to receive my money?

Federal law requires the FDIC to make payments of insured deposits “as soon as possible” upon the failure of an insured institution. While 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.

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.

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.

What happens to my loan now that my bank has failed?

Either the FDIC sold your loan at closing or the FDIC has retained it temporarily. In either case, your obligation to pay has not changed. Within a few days after the closure, you will be notified by the FDIC, and by the purchaser, as to where to send future payments.

In the case of a delinquent loan, the FDIC will “set off” the loan against the borrower’s deposits (if any) before paying deposit insurance. In the case of a non-delinquent loan, the depositor might elect to “set off” the loan against his/her deposits in order to receive full value for any uninsured funds (i.e., funds in excess of the $250,000 insurance limit). In either case, no “offset” is possible unless the obligations are “mutual” – meaning that the borrower and the depositor must be the same person or legal entity acting in the same legal capacity.

What happens if the FDIC sells my loan?

Loans are negotiable instruments that are routinely sold in the financial markets. When a loan is sold, the borrower retains all the rights and obligations associated with the note. The borrower will be notified by the new holder of the note and given payment instructions.

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