What happens when your bank fails? We asked the experts

New York-based Signature Bank is the most recent failure to make headlines in a string of collapses. This news came on the heels of Silicon Valley Bank’s (SVB) downfall which happened just two days prior and marked the second-largest collapse in U.S. history, behind the 2008 failure of Washington Mutual.

With more than $110 billion in assets, Signature Bank is the third-largest bank failure in U.S. history. 

In a statement released yesterday by Secretary of the Treasury Janet L. Yellen, Federal Reserve Board Chair Jerome H. Powell, and FDIC Chairman Martin J. Gruenberg, it was announced that SVB account holders would be fully protected and have access to their funds by March 13. 

Still, these recent failures have consumers and investors alike questioning just how “safe” their money is. 

What is a bank failure?

According to the FDIC, a bank failure is defined as the closing of a bank by a federal or state banking regulatory agency. This typically happens when a bank is unable to meet its obligations to depositors and others.

In the case of SVB, the culprit was a bank run. That’s when depositors rush to withdraw all of their funds all at once amid fears that the bank may fail.  As more customers withdraw their money, it increases the likelihood that the bank will default and run out of cash.

There was a sharp rise in bank failures during the 2007 to 2008 financial crisis, but the banking system hasn’t seen failures in such high numbers since then. 

How safe is your money?

In the event of a bank failure, the Federal Deposit Insurance Corporation (FDIC) steps in to offer insurance coverage up to a certain limit per depositor, per bank, for each account ownership category. The FDIC also acts as the “receiver” of the failed bank, meaning that it sells and collects the assets of the failed bank and settles its debts, including claims for deposits in excess of the insured limit.

The problem, the FDIC has its limits—knowing what those are can help you better protect your funds. 

“The FDIC protects $250,000 of deposits for each depositor and keeping balances below this will certainly protect you from a fallout like we are seeing with SVB,” says Lawrence Sprung, CFP and founder of Mitlin Financial. “You may have a delay in accessing your funds, which may have consequences of their own, but you will eventually get the funds. This is merely a way to protect those deposits from disappearing, as over the $250,000 limit you most likely will be out of luck.” 

According to the FDIC, “uninsured depositors will receive a receivership certificate for the remaining amount of their uninsured funds. As the FDIC sells the assets of Silicon Valley Bank, future dividend payments may be made to uninsured depositors.” Those with account balances in excess of $250,000 should contact the FDIC toll–free at 1-866-799-0959.

Where to put your money if your bank has failed 

If your bank fails, you’ll immediately receive written notice from the FDIC via mail. In many cases, you can expect to receive your money in a timely manner. According to the FDIC, Federal law requires that it make payments of insured deposits “as soon as possible” upon the failure of an insured institution (usually within a matter of days). 

If you were impacted by recent bank closures or find yourself in a similar position in the future, there are a few ways you can protect your funds. 

  1. Bank with an FDIC-insured institution: The FDIC’s BankFind Suite can help you determine if your bank is FDIC-insured, or you can contact the FDIC by phone to verify that your bank is a member. 
  2. Consider alternative account types: If your deposit account contains a balance that’s higher than the $250,000 limit, you have some alternative options that allow for a higher limit, such as the Certificate of Deposit Account Registry Service (CDARS).

    The catch: a certificate of deposit (CD) requires that you tie up your funds until your CD reaches its maturity date. Touching those funds beforehand could incur a steep penalty.

    “Many banks also offer cash management solutions that will provide FDIC insurance above the $250,000 limit too. As an example, let’s say you need to keep $1,000,000 in a bank and want it fully FDIC-insured. They provide one account for the deposits and then they will, behind the scenes, divide your deposit among five different banks which will have no more than the $250,000 maximum each. Bank A, B, C, and D each have a deposit of $250,000, and then once any interest is credited the bank would introduce Bank E to assure all of your deposits are fully insured,” says Sprung. “Not every bank has this or does this, so it is important to know who your deposits are with and what is insured.” 

  3. Consider opening an account at a local credit union: Another option could be to explore keeping some of your money at a credit union. “Credit unions are also a good option to see if they can provide you with the coverage and what you need from a banking relationship. They may also allow you to put money in additional banks in your local area,” says Sprung. Credit unions are insured by the National Credit Union Administration (NCUA), and it offers coverage up to $250,000 per share owner, per insured credit union, for each account ownership category. You can visit the NCUA’s Credit Union Locator to find an NCUA-insured credit union near you. 

The takeaway 

While this recent series of bank failures may seem jarring, experts say it’s never completely outside the realm of possibility, and consumers should know what it means for their money. 

“Businesses have issues all the time and banks are no different,” says Sprung. “The difference is we have an inherent trust in the banking system and the FDIC to help protect the interests of the public, sometimes this works and sometimes it does not. The important thing for depositors to understand is how to protect themselves from the financial impact this could cause them.”

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