Why Are Banks Closing in the US and Is Your Money Safe?

The stability of the financial system is a frequent topic of public discussion, often sparking questions about the safety of personal funds. News of banking challenges can naturally lead individuals to wonder if their money is secure and what happens if a bank encounters difficulties. Understanding the dynamics of bank operations and the safeguards in place can help clarify these concerns.

Understanding Bank Closures in the US

Bank closures in the United States occur through different mechanisms, primarily bank failures or mergers and acquisitions. A bank failure happens when a financial institution becomes insolvent, meaning its liabilities exceed its assets, and regulators step in to close it. In contrast, mergers or acquisitions involve one bank purchasing another, which can lead to branch consolidation or rebranding without the underlying institution being insolvent.

The frequency of bank failures has varied significantly. While no banks failed in 2021 or 2022, five banks failed in 2023, including some larger institutions. Two banks have failed so far in 2025. Historically, 465 banks closed between 2008 and 2012, a period with a higher number of failures, contrasting with an average of just over three failures per year from 2001 to 2007.

Primary Causes of Bank Failures

Bank failures typically stem from a combination of internal mismanagement, excessive risk-taking, and adverse economic conditions. A bank becomes insolvent when the value of its assets drops below its obligations to creditors and depositors. This often happens due to poor investment decisions or a decline in the quality of its loan portfolio.

Specific factors contributing to insolvency include inadequate credit risk assessment, insufficient liquidity management, and excessive leverage. For example, a bank’s financial health can deteriorate rapidly if many loans default or investments lose significant value. Economic downturns exacerbate these issues, leading to increased loan defaults, reduced asset values, and tighter liquidity. Fraud or failure to adhere to sound internal controls can also undermine stability. Some failures also stem from poor interest rate risk management, where investments made at low rates decline in value as market rates rise.

Deposit Insurance and Account Security

The Federal Deposit Insurance Corporation (FDIC) plays a central role in protecting customer funds in the event of a bank failure. The FDIC insures deposits held in checking accounts, savings accounts, money market deposit accounts, and certificates of deposit. This protection extends to at least $250,000 per depositor, per FDIC-insured bank, for each account ownership category.

Different ownership categories, such as single accounts, joint accounts, and certain retirement accounts like Individual Retirement Accounts (IRAs), receive separate insurance coverage. For instance, a person with a single account and a joint account at the same bank can have more than $250,000 insured across those accounts. FDIC insurance does not cover non-deposit investment products, such as stocks, bonds, mutual funds, or the contents of safe deposit boxes, even if they are offered by an FDIC-insured bank. When a bank fails, the FDIC typically resolves the situation by either transferring insured deposits to a healthy acquiring institution or by directly paying depositors the insured amount. This process is designed to be seamless for customers, with insured funds generally becoming available within two business days.

Oversight and Prevention Measures

Several regulatory bodies oversee the U.S. banking system to promote stability and prevent failures. These include the Federal Reserve, the FDIC, and the Office of the Comptroller of the Currency (OCC). Each agency has specific responsibilities in monitoring and supervising financial institutions.

The OCC charters and supervises national banks, the FDIC insures deposits and supervises state-chartered banks that are not members of the Federal Reserve System, and the Federal Reserve oversees state-chartered banks that are members of the Federal Reserve System and regulates bank holding companies. These agencies conduct regular examinations, evaluating financial health, risk management practices, and compliance using the CAMELS rating system (capital adequacy, asset quality, management, earnings, liquidity, and market risk sensitivity). Regulators use these assessments to identify problems early and intervene, encouraging mergers or capital raises to avoid failure. If a failure becomes unavoidable, the FDIC’s resolution process aims for an orderly transition, typically by arranging for a healthy bank to acquire the failing institution’s deposits and assets, minimizing disruption to customers and the financial system.