Many people are concerned about what happens to a bank when it is taken over by the FDIC during the recession. It is important to be aware of this issue because many banks closed during the recession and hundreds are still on the FDIC’s watch list.
According to the FDIC as of March this year, 565 banks have closed since October 1st 2000. You never know when the FDIC will take over your bank, even if you think the worst has passed.
Quick Note
The FDIC website has a list of failed banks that shows the number of bank closures.
The FDIC closes a bank
The FDIC tries to keep the decision to close a particular bank a secret until the very last moment. The FDIC does this to avoid a bank run if consumers learn of the impending closure. The FDIC staff will enter the bank when they are ready to close the operations. This usually happens on a weekend. When possible, the FDIC closes all bank branches at once. The bank will be closed on the weekend.
If this doesn’t happen, the bank is placed under a data-wpel-link=”external” href=”https://corpgov.law.harvard.edu/wp-content/uploads/2008/10/092608overviewfdicasconvervatorreceiver.pdf”>FDIC conservatorship/a> and the FDIC runs it. In the event that this does not happen, the FDIC will take over the bank and place it under FDIC conservatorship. The FDIC prefers to have another bank take over when this is possible.
Many banks open to the public on the Monday following the weekend, whether or not someone is lined up by the FDIC. FDIC personnel spend the weekend working with employees, managers, and bank owners to determine the current state of the banks, and organize assets and liabilities.
There are other agencies that can help, including the Office of Thrift Supervision (to handle credit cards), the Office of Comptroller of the Currency, and even the state agencies. Customers can resume normal business when the bank reopens on Monday.
What Happens To Your Money
Your money is generally safe when the FDIC takes over a bank. FDIC covers deposit accounts up to $250,000 for each depositor and per bank. This amount is permanent, so you will still be able to get your money if the bank fails. Your accounts will transfer to the new bank if someone else takes over your bank. You can choose whether to keep them there or not.
If the FDIC is in charge of a bank, it’s likely that they will begin to cut checks to customers and sell off other assets.
You will receive your money if your bank is shut down by the FDIC and no other banks take over. It may take hours to wait in line or a few weeks for your check. Cleared transactions can be returned if the bank is closed.
Fees can be refunded but it is not easy. You will have to update all your automatic debit transactions (even if a new bank takes over).
You may also lose interest on certain deposit accounts if you do not have immediate access to the money. You may be required to get a CD at a lower rate or to adjust your other accounts and deposits.
| Step Number | Description | Impact on Customers |
|---|---|---|
| 1 | FDIC identifies healthy banks to purchase the failed bank if possible | – Transfer of accounts to the acquiring bank – Access to funds continues Notification of account changes |
| 2 | FDIC liquidates failed banks (if no acquirer bank is found). | Deposits insured up to coverage limit – Possibility of receiving a check or other form of payment. |
| 3 | Handling loans and other banking service | Transfer of services and loans to the acquiring bank if bank is acquired – Notifications of any changes in loan terms and payment information (if the bank is liquidated, or if loans are sold to another bank) |
| 4 | Communication with Customers | The FDIC will communicate through local news, the bank website, and by mailed notices For important updates, customers must maintain their contact information. |
| 5 | Deposits are insured | Customers are usually able to access their deposits within days of the closure of the bank |
| 6 | Recovering uninsured funds | – Recovery of all or part of the uninsured money, depending on proceeds from bank liquidation – There is no guarantee that all uninsured funds will be recovered |
| 7 | Resolving a failed bank | The overall resolution process may take several months, or even many years depending on the complexity and size of the bank’s assets and liabilities |
Debt does not go away
Your debt is also intact. Either the debt is administered by a new bank or sold to another lender. All loans with the failed institution will be listed on your balance sheet and taken care of.
Investing through a bank could be a different story. You could suffer losses since these investments are not FDIC-insured. Double check.
Your bank account and the FDIC
You can get your cash deposits insured as long as they do not exceed $250,000. There are also other costs associated with the FDIC seizing a bank, such as time and inconvenience. Check the status of your bank and have a backup plan in place, just to be prepared for this eventuality.
