If a Bank Goes Under, What Happens to My Money?

Robust systems are in place to protect funds in the event of a bank failure, providing security for depositors and maintaining financial stability. Understanding these protections can alleviate concerns and clarify the process should a bank cease operations.

Understanding Deposit Insurance

Deposit insurance provides a fundamental layer of protection for money held in banking institutions. The Federal Deposit Insurance Corporation (FDIC) is an independent federal agency established in 1933 to safeguard deposits in American commercial and savings banks. The FDIC insures deposits up to a specific amount, backed by the full faith and credit of the United States government.

The standard insurance amount is $250,000 per depositor, per insured bank, for each account ownership category. This means that all funds a single individual holds in checking, savings, money market deposit accounts, and Certificates of Deposit (CDs) at one insured bank are combined and insured up to this limit. For example, if an individual has $150,000 in a checking account and $100,000 in a savings account at the same bank, the total $250,000 is covered.

Coverage can extend beyond this $250,000 limit through various ownership categories. These categories include single accounts, joint accounts, certain retirement accounts, and trust accounts. For instance, a joint account held by two individuals at the same bank is insured up to $500,000, providing $250,000 per co-owner.

Retirement accounts like Traditional IRAs, Roth IRAs, SEP IRAs, SIMPLE IRAs, and self-directed 401(k)s are also separately insured up to $250,000 per depositor at each bank. Similarly, certain trust accounts can significantly increase coverage based on the number of unique beneficiaries named. By structuring accounts across different ownership categories or at multiple FDIC-insured institutions, depositors can potentially insure amounts exceeding $250,000.

For credit unions, similar protection is provided by the National Credit Union Administration (NCUA). The NCUA operates the National Credit Union Share Insurance Fund (NCUSIF), which offers share insurance coverage identical to the FDIC. This includes the $250,000 limit per depositor, per insured credit union, for each ownership category.

What Deposit Insurance Does Not Cover

While deposit insurance offers broad protection for traditional bank accounts, it does not extend to all financial products or assets. Coverage is specifically for deposits held in insured accounts, not for investment products. Products such as stocks, bonds, mutual funds, annuities, and life insurance policies are not insured by the FDIC or NCUA, even if offered through an insured bank or credit union.

Cryptocurrency assets, even those held or facilitated by a banking institution, are not covered by deposit insurance. These digital assets are subject to different regulatory frameworks and inherent market volatility.

Furthermore, the contents of safe deposit boxes are not insured by either the FDIC or the NCUA. These boxes are used for storing personal property, not for holding deposit funds. Individuals who wish to insure items stored in a safe deposit box should consider purchasing private insurance, such as homeowners or renters insurance, which may offer coverage for such valuables.

The Process of a Bank Failure

When a bank faces insolvency, the FDIC typically intervenes to resolve the situation, often over a weekend to minimize disruption. The FDIC’s primary goal is to protect insured depositors and maintain public confidence in the banking system. They act as a receiver for the failed institution, taking control of its assets and liabilities.

There are two main methods the FDIC uses to resolve a failed bank. The most common is a “purchase and assumption” transaction. In this scenario, a healthy bank acquires the failed bank’s deposits and often some of its assets. Depositors of the failed bank automatically become customers of the acquiring bank, and their accounts are transferred. Access to funds, including direct deposits and automatic payments, usually continues without interruption, often by the next business day.

If a purchase and assumption transaction is not feasible, the FDIC may proceed with a “deposit payoff.” In this less common method, the FDIC directly pays insured depositors the amount of their insured funds. Payments are typically made by check or direct deposit, usually within a few business days of the bank’s closing. In either resolution method, accrued interest up to the date of the bank’s failure is included in the insured amount.

Loan obligations held by customers of a failed bank do not disappear. These loans are typically sold to another financial institution, and borrowers continue to make payments to the new entity as per the original terms.

For depositors with funds exceeding the $250,000 insurance limit, the process is different. These uninsured funds are not immediately accessible and become a claim against the failed bank’s estate in the receivership process. Recovery of uninsured funds depends on the liquidation of the bank’s remaining assets. Uninsured depositors are paid after insured depositors and other priority claims are satisfied. While the FDIC may issue an “advance dividend” of a portion of uninsured claims based on asset valuations, full recovery is not guaranteed and can take an extended period, often years.