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Updated on Wednesday, July 31, 2019
Imagine waking up one morning to learn your bank or credit union just went out of business. It happens more often than you may think. While no banks failed in 2018, that was only the third year since 1933 without a single bank failure. On average, roughly seven banks go out of business each year — and during the financial crisis in 2010, 157 banks failed in one year alone.
If your bank or credit union ends up failing, what happens to your money and how do you get it back? This article covers the financial safeguards the government runs for depositors as well as how you can use these programs to keep your money safe.
Why do banks fail?
If you have a checking account or a savings account, your financial institution doesn’t just keep all your money in a vault. While banks and credit unions hold onto some cash to process withdrawals, they know that depositors are unlikely to withdraw all of their money at once. As a result, they use some of the deposits to make investments, like small business loans or mortgages. When things go smoothly, the institution earns a profit on their investments while keeping enough cash to process withdrawal requests.
When the investments go poorly, it can lead to bank failures. For example, if a large number of borrowers go bankrupt and can’t pay back their mortgage loans to a bank, the bank takes a loss on the unpaid loans and may not have enough money to cover all their deposits. This is partly what caused so many banks to close after the 2008 housing collapse and financial crisis.
If a financial institution ends up losing too much on their investments, they could end up not having enough in assets to repay all their deposits. In other words, they owe more than they own. This is when the government considers a bank to have failed.
What happens after a bank failure?
Bank failures used to be a serious problem for consumers. If you look at pictures from back in the Great Depression, you can find photos of people lining up on the street to withdraw their money from a bank — a so-called “bank run.” If the bank failed before you withdrew your money, you would lose all of your savings.
To fix this problem, the government launched the Federal Deposit Insurance Corporation (FDIC) in 1933. The FDIC backs up deposits so if your bank fails, the FDIC will pay you your money back, up to their coverage limits of $250,000 per depositor per bank per type of ownership category (see below for more information on how the limits work.) According to FDIC spokeswoman LaJuan Williams-Young, “No depositor has ever lost a penny of insured deposits since the FDIC was created in 1933.”
This insurance covers funds in deposit accounts like checking accounts, savings accounts, money market accounts and CDs. However, it doesn’t cover stocks, bonds, annuities, life insurance or mutual funds, even if you bought these investments through a bank.
For credit unions, your deposits are insured by the National Credit Union Administration (NCUA). Whether you deposit with a credit union or with a bank, the government protects your money against failure.
How do you get your money back in a bank failure?
If your bank or credit union is about to fail, the government tries to find another institution to acquire the failing one. The purchasing institution then sets up new accounts for all the customers and it’s like you just transferred your insured balance over yourself.
Your direct deposits will automatically be rerouted to the other bank/credit union. For a short period of time after the failure, you will still be able to write checks using your old account, though the new one should soon give you replacement checks.
It is possible that the FDIC/NCUA will not be able to find an acquiring bank or credit union. In this case, they will send you a check to cover your insured deposits. The FDIC and the NCUA both aim to pay back the insured funds within a few days after your bank closes. You’ll get your insured deposits bank along with any interest you earned up to the day your bank failed.
What if your deposits exceed FDIC insurance limits?
As mentioned, the FDIC and NCUA set a limit to how much they insure on deposits. They both cover $250,000 per depositor, per financial institution, per type of ownership. In most cases, this means that you can keep up to $250,000 at one institution and qualify for the insurance. The exception is if you have more than one type of legal ownership for your accounts. Some types of ownership include single, joint and part of a trust.
For example, if only you are depositing money into an individual account, you’ll be covered up to $250,000 at each bank. If you get married, you can open another joint account with your spouse and deposit an additional $250,000 per bank in a joint account while staying insured.
So what happens if you keep more than the FDIC or NCUA insured limits and your bank fails? In this case, the FDIC and NCUA will cover you up to the $250,000 insured limit. After that, you’ll have a legal claim against the failed institution. The government will be in charge of selling off the failed bank’s remaining assets to pay people back as much as they can, but there is no guarantee you’ll receive all your deposits back.
Let’s say have $300,000 in deposit with one bank and it fails. You’ll receive $250,000 back from the FDIC but whether you’ll receive any of the remaining $50,000 depends on whether the FDIC can sell off the failed bank’s assets and at what price.
Tips to keep your money safe from bank failures
- Only deposit with insured institutions: Before depositing your money with any institution, make sure they’re covered by the government. Banks covered by the FDIC should have a sign in their entrance saying their deposits are insured. Credit unions have a similar notice from the NCUA.
- Don’t exceed the insured deposit limits: The FDIC and NCUA both insure up to $250,000 per person per bank per type of ownership. If you deposit more money than the insurance limits, your funds are not insured and could be lost during a failure. You’d be safer opening a new checking or savings account at another bank/credit union so the deposits are all insured. If you’re close to the insurance limits and aren’t sure whether you qualify, the FDIC offers an online tool to help you check. “Depositors and bankers can use the FDIC’s Electronic Deposit Insurance Estimator (EDIE), on a per-bank basis, for insurance rules and limits that apply to a depositor’s specific group of deposit accounts — what’s insured and what portion (if any) exceeds coverage limits at that bank,” said Williams-Young. Additionally, the FDIC offers a toll-free hotline that lets depositors ask questions about their coverage—call (877) 275-3342.
- Consider using multiple banks/credit unions: When a bank or credit union fails, it’s more of an inconvenience than a serious problem as you should get your money back within a few days. But that’s still a stretch when you might need a bank account for cash or to pay bills. If you work with more than one bank/credit union, you’ll have a backup account ready to go just in case your primary institution fails. Want another checking account? These are the best online checking options available today.
- Watch out for non-insured accounts: Banks and credit unions also offer investment products that are not insured. Investments like stocks, bonds and mutual funds can lose money and those losses are not covered by the government. Don’t assume just because a product comes from a bank or credit union, it must be insured against loss.
- Still keep your money at a bank or credit union: Despite all this information about bank failures, banks and credit unions are still a much safer place to keep your money than at home. If you hold onto large amounts of cash, you risk losing it to a robbery or fire. Homeowners insurance typically only covers the loss of cash to a few hundred dollars. That’s nowhere near the $250,000 insurance limits at a bank or credit union.
The final word on bank failures
While bank failures are not nearly the problem they once were, they still do happen. The FDIC and NCUA can keep your deposits safe provided you follow their rules and insurance limits. By using this information and planning ahead, you’ll keep your deposits in good shape even in the worst-case scenario after a bank/credit union fails.