What happens to my money if my bank fails?

I had the pleasure of meeting with a group of “adult learners” on Wednesday and was asked a great question by a gentleman we’ll call Rob … “If my bank got shut down, would I lose all of my money?”  The short answer is “NO” … with a few provisos.  Let’s examine a hypothetical situation.

Let’s assume that Rob has a savings account at the Greatest Ever National Bank (GENB).  After his paycheck was direct deposited on Friday morning, the balance is $1,200.

At 6:00 p.m. on Friday afternoon, GENB closed and locked the doors as they have always done.  However, this day was unlike any other because at 6:01 p.m., the FDIC came in and declared the bank to be “insolvent” and closed it down … forever.  Now what happens?

The first and most likely possibility is that the FDIC will have a bank that is solvent (called the assuming bank) take over the insured deposits that GENB held … including Rob’s savings account.  We’ll call this assuming bank the First Bank of Deliverance (FBoD).  When Rob’s bank opens on Monday morning, it will be doing business as First Bank of Deliverance and Rob will be their new customer.  For Rob, life goes on as usual with no interruptions to his cash flow … his $1,200 balance is safe and available for him to pay bills, make withdrawals. or whatever else he planned to do with it..

Of course, if no healthy bank is willing to take over the Greatest Ever National Bank’s customers, then the FDIC will issue a check to each depositor for full balance of the customer’s account, up to the insured limit.  The FDIC’s goal is to pay these depositors within two business days.

The current insurance limit is $250,000 per account.  If Rob has more than one account; and, if these accounts have different legal ownership (for example, one account is in Rob’s name alone; and, Rob and his wife have another, joint, account), Rob’s deposits could be insured for more than $250,000 so long as neither account has more than $250,000 in it.

There are some wrinkles if the money is in a trust or is being managed by a fiduciary; but, for most people, the scenarios above answer Rob’s question.  For more information, visit: http://www.fdic.gov/consumers/banking/facts/index.html.

GREAT QUESTION, ROB!  Thanks for asking.