If a Bank Fails, What Happens to Your Money?

A bank failure can be unsettling, raising questions about the safety of deposited funds. While uncommon, safeguards are in place to protect consumers. These mechanisms ensure that a bank failure does not lead to widespread loss of savings, maintaining public confidence and stabilizing the banking environment.

Understanding Deposit Insurance

Deposit insurance protects money held in banking institutions. The Federal Deposit Insurance Corporation (FDIC), an independent U.S. government agency, administers this. The FDIC’s backing by the full faith and credit of the U.S. government ensures insured deposits are secure, even if a bank fails.

The standard deposit insurance amount is $250,000 per depositor, per insured bank, for each account ownership category. If an individual has multiple accounts at the same bank, the total insured amount depends on how those accounts are owned.

Coverage can extend beyond $250,000 if funds are held in different ownership categories at the same bank. Common categories include single accounts, joint accounts, and certain retirement accounts (IRAs, 401(k)s). Other categories are revocable/irrevocable trust accounts, corporation/partnership/unincorporated association accounts, and government accounts. For example, a married couple with a single account for each spouse and a joint account could potentially insure up to $1 million at one bank.

FDIC insurance covers deposit products like checking accounts, savings accounts, money market deposit accounts (MMDAs), and certificates of deposit (CDs). Cashier’s checks and money orders issued by a bank are also protected. Coverage is automatically applied when an account is opened at an FDIC-insured bank.

The Process of a Bank Failure

When a bank fails, the FDIC steps in as the receiver, taking control. This often occurs after the close of business on a Friday to minimize disruption. The FDIC’s goal is to protect insured depositors and ensure quick access to their funds.

The most common method for resolving a failed bank is a “Purchase and Assumption” (P&A) transaction. A healthy bank acquires the insured deposits and often some assets of the failing institution. Depositors automatically become customers of the acquiring bank, and their accounts are transferred with little interruption. Funds remain accessible, and services continue as before.

If a P&A transaction is not feasible, the FDIC resolves the failure through a “deposit payoff.” The FDIC directly pays depositors the insured amount for their accounts. Payments are usually made by check or direct deposit, or funds are made available at another bank. The FDIC aims to make insured funds available within a few business days, often within two business days, of the bank’s closure.

Depositors are typically notified by the FDIC about the bank’s closure and how to access their funds. In many cases, depositors do not need to take significant action. Uninsured deposits, exceeding the coverage limit, become claims against the failed bank’s estate. While recovery is possible as assets are liquidated, there is no guarantee, and the process can take an extended period.

Other Assets and Liabilities

Beyond traditional deposit accounts, individuals and businesses may have other financial relationships with a bank not covered by deposit insurance. Their treatment during a bank failure differs significantly from insured deposits.

Investments like stocks, bonds, mutual funds, annuities, and cryptocurrency are not FDIC-insured, even if purchased through a bank’s brokerage arm. These products are subject to market risks, separate from a bank’s stability. For brokerage accounts, the Securities Investor Protection Corporation (SIPC) may provide protection, covering up to $500,000 for securities and cash, including a $250,000 limit for cash, if the brokerage firm fails.

The contents of safe deposit boxes are not covered by FDIC insurance. A safe deposit box is a rental agreement; the bank provides storage but does not insure the items within. In a bank failure, customers can typically retrieve their contents. If another bank acquires the institution, access usually continues, or the FDIC provides retrieval instructions.

Loans, mortgages, and credit card accounts are customer liabilities, not bank assets. If a bank fails, these obligations do not disappear. Repayment responsibility transfers to the acquiring bank or the FDIC. Loan terms, including interest rates and repayment schedules, generally remain unchanged. Borrowers will be notified where to send future payments.