What Happens When the Bank Runs Out of Money?

Bank failures are uncommon, but a strong framework protects depositors and maintains financial stability. Regulatory bodies oversee banks and manage distress to ensure public access to financial services.

Deposit Insurance Protection

Deposit insurance protects bank customers’ funds in the event of a bank failure. In the United States, the Federal Deposit Insurance Corporation (FDIC) provides this insurance for deposits in FDIC-insured banks. The FDIC maintains a Deposit Insurance Fund (DIF), funded by premiums from insured banks, not taxpayer money.

The standard insurance amount is $250,000 per depositor, per insured bank, per account ownership category. Multiple accounts at the same bank in different ownership categories can result in coverage exceeding $250,000. Common categories include single accounts, joint accounts, and certain retirement accounts like IRAs. For instance, a joint account with two owners is insured up to $500,000.

FDIC insurance covers deposit products like checking accounts, savings accounts, money market deposit accounts (MMDAs), and Certificates of Deposit (CDs). It also covers official bank items such as cashier’s checks and money orders. However, it does not cover investment products like stocks, bonds, mutual funds, annuities, or cryptocurrencies, nor the contents of safe deposit boxes.

To verify if a bank is FDIC-insured, look for the “Member FDIC” logo at bank branches, on websites, and on account statements. The FDIC also offers an online BankFind tool or can be contacted directly at 1-877-ASK-FDIC (1-877-275-3342).

The Regulatory Response to Bank Distress

Before a bank fails, regulatory oversight identifies and addresses signs of financial distress. Federal agencies, including the FDIC, Federal Reserve, and Office of the Comptroller of the Currency (OCC), continuously monitor financial institutions. They conduct regular bank supervision and examinations, assessing financial condition, risk management, and regulatory compliance.

Regulators look for early signs of trouble, such as declining asset quality, insufficient capital, or liquidity issues. A bank showing weakness may be designated a “troubled bank,” leading to more intensive monitoring and intervention from regulatory authorities.

To prevent failure, regulators implement corrective actions. These include issuing cease and desist orders, requiring capital increases, or mandating changes in management or operations. These interventions compel the bank to rectify issues and restore financial health, minimizing potential losses to the Deposit Insurance Fund.

Bank Failure and Resolution Process

When a bank’s financial condition deteriorates beyond recovery, its chartering authority closes the institution, and the FDIC is appointed receiver. The FDIC immediately takes control of the bank’s assets, records, and operations. The FDIC’s goal is to resolve the failed bank, protecting insured depositors, minimizing financial system disruption, and being the least costly option for the Deposit Insurance Fund.

The most common resolution method is a Purchase and Assumption (P&A) transaction. In a P&A, a healthy acquiring bank purchases the failed bank’s assets and assumes its liabilities, including all insured deposits. This process provides a seamless transition for customers, who become customers of the acquiring bank with no interruption in services. The acquiring bank takes over branches, and depositors retain full access to their insured funds.

If a suitable acquiring institution is not found, the FDIC may proceed with a Deposit Payoff. This method involves the FDIC directly paying insured depositors the full amount of their insured funds. While a deposit payoff ensures insured depositors receive their money, it is less seamless than a P&A, as customers may need to open new accounts elsewhere. The FDIC makes insured funds available quickly, often within two business days.

Accessing Your Funds After a Bank Failure

Following a bank failure, depositors are notified through mail, public announcements, and the FDIC’s website. The FDIC ensures insured depositors have prompt access to their funds. This process is quick, especially in a Purchase and Assumption scenario where deposits transfer to an acquiring bank.

If your bank is acquired, direct deposits (like payroll or Social Security) and automatic payments transition smoothly to the new bank. You retain access to ATMs, debit cards, and online banking services from the acquiring institution. Existing checks continue to clear, and you can make payments from your account without interruption.

In a direct deposit payoff, the FDIC sends checks for the insured amount or arranges direct deposits into a new account. Depositors do not need to file a claim to receive insured funds. To confirm balances or for assistance, depositors may need to provide identification and account statements. The FDIC establishes a dedicated toll-free customer service line for each failed bank.

Uninsured Deposits

Funds exceeding the FDIC insurance limit of $250,000 per depositor, per insured bank, per ownership category are considered uninsured deposits. These funds are not immediately covered by the FDIC’s direct insurance payout. In a bank failure, uninsured deposits are treated differently than insured deposits.

If the failed bank is resolved through a Purchase and Assumption transaction where the acquiring bank assumes all deposits, both insured and uninsured funds may transfer, increasing the chance of full recovery. If no such agreement is reached, uninsured depositors receive a receivership certificate from the FDIC, representing a claim against the failed bank’s assets.

Recovery of uninsured funds depends on the FDIC, as receiver, liquidating the failed bank’s assets. Proceeds from asset sales are distributed by statutory priority. Secured creditors are paid first, then administrative expenses, and then insured deposits (already paid by FDIC). Uninsured depositors are next, but their recovery amount is not guaranteed and may be less than their original balance.

The process of liquidating assets and distributing funds to uninsured depositors can be extended, taking months or years and involving multiple dividend payments. While the FDIC works to maximize recoveries, uninsured depositors bear the risk of losses.