What Happens to Your Money If Your Bank Fails

In the last several months, we have seen major financial giants such as AIG and Wachovia go under. Other major financial companies such as Citibank and Bank of America are near the edge of insolvency and a number of other banks and financial institutions will likely become insolvent and fail within the next year. We could see several major financial institutions disappear in the matter of a few months. Some banks that may appear perfectly okay one day may be declared insolvent the next. Be prepared and know what will happen to your money in the event that your bank goes under.

The Federal Reserve has a number of analysts which regularly audit banks and makes sure that they are financially sound and have enough assets to service the debt that they have. If the value of any given bank’s loans is substantially devalued because the people that have borrowed the money have failed to make their payments, the ratios could be significantly skewed against the bank. They might have much more in deposits than they actually have money to pay people. This means that if everyone wanted their money from the bank, the bank would not be able to provide it. The technical term for this is called insolvency.

If the Federal Reserve determines that a bank is insolvent, typically one of two things will happen. In many cases, the Federal Reserve will engineer a buyout from another bank. Typically the Federal Reserve will back certain risky assets that the failed bank has so that it’s palatable for the financial institution to purchase the failed bank. This almost happened with Wachovia and Citibank before Wells Fargo jumped in at the last moment and offered a better deal that did not require the Federal Reserve to put up any money for the purchase.

After the purchase is completed, the old bank will likely continue to operate as before and customers will not lose any of their money in their accounts. If you have any fixed-rate investments, such as a certificate of deposit, typically the bank Is not required to honor the rates that the previous bank was providing, but the new bank will be required to allow the customer to cancel their CD early without any fees or lost interest.

In the event that the Federal Reserve deems that a bank could fail without any major disruption in the market place and no suitable buyer can be found, they may simply let the institution fail. This means that individuals with FDIC insured accounts will be paid up to $250,000, usually within a couple of days and the bank’s assets will be sold to the highest bidder. Typically this money will come in the form of a cashier’s check.

After 2009, the insurable dollar amount will return to $100,000.  There are other ways that you can increase your FDIC insurance, such as adding your spouses’ name to the account or by specifying a beneficiary that’s a family member. It’s important to make sure that all of your money in one bank is never more than $90,000. This way both your principal and interest are protected in the event that your bank fails.