A question that have crossed the minds of people who have a savings account, credit card, or checking account at any bank is, what will happen to their account in case the bank closes? As your bank works to grow the money you invested over time, there still comes a risk, although a relatively minimal one. Banks can sometimes make a bad decision and lose money. In the event that your bank would have to close, you will also lose money you have invested. Thanks to a law passed by the United States government, you may still recover money you have lost in cases of such an unforeseen event.
The Role of FDIC
It was reported that back in 1930s
during the Great Depression, a large number of people tried to withdraw all
their money from bank accounts—events that was called “bank runs.” To better
protect consumers, then US President Franklin D. Roosevelt signed the Banking
Acts of 1933, which gave birth to the Federal Deposit Insurance Corporation
(FDIC). The FDIC provides deposit insurance to protect individual accounts
against bank failure.
Depositing funds at an FDIC-insured
bank secures investments and provides insurance in case the bank goes under.
The best thing about it is that the investor can benefit from the insurance
policy even if they don’t spend anything on premiums. The banks are the ones
that pay premiums on behalf of their depositors. The premiums paid by the banks
comprise FDIC’s deposit insurance fund, which is used for paying back losses to
depositors.
So how does the FDIC help when a
bank is falling down? First of all, the FDIC will be monitoring the failing
bank closely and takes charge of the bank through a conservatorship. Depositors
will get a letter in the mail where they will be informed that their bank will
be closing soon. The bank will then be turned over to the FDIC, which will try
to sell the bank.
If the Bank is Sold
During the takeover, the bank may
close down on a Friday and then open again on a Monday after it has been taken
over. You may still use your bank ATMs, old checks, and debit cards up to the
amount insured, but only for a limited time, usually a few months.
Meanwhile, direct deposits will be
transferred automatically to your account at the new bank. Certificate of
deposits (CD) at a failed bank is insured for up to $250,000 by the FDIC. On
the other hand, time-deposit CDs will still mature in the same period as agreed
upon with the original bank because it’s considered legally binding. If you’re
a CD owner, you need to check the mail for alerts. Acquiring bank will tend to decrease
the rate.
For closed banks, a check will be
sent typically within a week. If yours is a checking account, you’ll need to
order new checks from the new bank. You can also choose to close the account
and move to another bank altogether, although you’ll have to wait longer because the paperwork
will take long to process.
A standard money market account,
which is very much like a savings account, will earn interest rate set by the
bank and typically has a limit for the amount of transactions for its customers.
It’s usually insured by the FDIC for up to $250,000.
The standard money market should not
be confused with money market mutual fund, which usually consists of short-term
CDs, including government or corporate bonds and treasury bills. Because these
funds are investments held by mutual funds and are not bank deposits, they are
not insured by the FDIC. If your money market deposit account is insured,
expect your money to be inaccessible for several days. Interest rates may also
be subject to change with the new owner.
Meanwhile, fiduciary accounts
including brokered accounts, escrow accounts, Uniform Transfers to Minors Act,
UTMA, accounts, Interest on Lawyer Trust Accounts or IOLTA, are insured for up
to $250,000 by the FDIC. Fiduciary accounts are the accounts owned by one party
but managed by another.
If the Bank is Not Sold
So what happens if the bank is not
sold to any entity, you ask? You’ll get a check in the mail for the loss of up
to the insured limit. However, during the time of processing, you’ll have to
wait several days before you can get access to your money, or you’ll have
limited access. Instructions will also be sent to you regarding what to do with your safety deposit box.
How Much Will I Get?
If you are a depositor, then you will
get an insured rate of up to $100,000 per bank account. This means that if the
account is a joint account, you will get half of it. Meanwhile, if you have
below $100,000 in the closed-down bank, you will be pleased to know that you’ll
most likely be getting all your money back. The insurance covered by FDIC
includes savings, money market, checking accounts, and CDs. The downside of it
is that stocks, bonds, mutual funds, stocks, or life insurance plans aren’t
covered.
If you have more than $100,000 worth
of assets in the bank, a good precautionary measure will be to spread the funds
across more than one bank. You can also maximize insurance on your funds by utilizing the various types of ownerships. IRAs are usually insured for up to
$250,000. If you have bank assets worth more than $250,000, any amount beyond
that is not insured.
Meanwhile, those who had no time to
insure all of their bank funds may still get refunds from the FDIC, with an
average return of 72 cents per dollar.
What Happens To Your Loan?
In case you’re wondering what to do
with your loans (credit card loans, personal loans, etc.) in case a bank closes
down, you should definitely continue paying your loans according to your
agreement with the bank. Just because a bank was sold to another entity doesn’t
mean that you should stop fulfilling your payment obligations. It’s recommended
that you continue with the payments and just wait for a loan statement from the
new bank. The process of establishing a new entity might take some time.
