What Happens When a Bank Fails?

On September 28th, 2007, my bank went bankrupt and closed its doors…goodbye, Netbank. The moment you first find out that your bank failed is a scary moment. First thought: “I know I should have figured out what FDIC Insured meant.” Second thought: “Google, can you save the day today?” How do you know if your bank failed and went bankrupt?

Photo by pedrosimoes7 via Flickr.

Banks don’t typically announce that they are closing the doors.  The FDIC won’t tell you anything is in the works until it is done.  Don’t expect to know beforehand.  Fortunately, it is possible to do your own homework and do a bank rating save search just to get an idea of the bank’s financial strength.

But when they eventually fail it won’t be hard to find out.  They will have something on their website and doors.  Don’t forget that the news stations love this kind of news, as people stay tuned when their money is on the line.

What Should You Do When Your Bank Fails?

Step #1: Relax (assuming you had less than $250,000 total worth of accounts)

If you don’t already know, this is a good time to learn about FDIC insurance.

Banks are required to purchase insurance to cover their savings in case the bank goes bankruptcy.  This insurance covers you up to $250,000.  If a bank fails and you have less than this amount in savings, you will get your money back.*

* Some people talk about a catastrophic situation where multiple banks close at one time.  In this case, if there were ever more claims than money available, then it could theoretically be possible that you would not get your money.  But, this is a long stretch.

If you have more than the FDIC insured balance when the account closes, you may not receive all your money back.  David Barr says that, on average, people get 0.72 cents per dollar above the insured amount.  It does range from anywhere between 0.40 – 1.00 per dollar.

Tip: If you currently have more than $250,000 in savings at a bank, split up your money between multiple bank savings accounts.  It simply is not worth the risk of having huge sums of money in one account.

Step #2: Contact the Bank or Assigned Representative

When the bank fails, the FDIC will assume all assets and attempt to sell the bank as soon as possible.  You will be provided with a contact number that will help answer any questions you have.  Before contacting the bank you will need to organize your financial documents so you know exactly what open accounts you have with the bank.

The most important question is who is purchasing the bank?  Typically, the bank will be sold to another bank, and as quickly as possible, the bank will reopen (sometimes as quickly as overnight) and resume normal business practices.  You might not even need to change banks.

During the time of transition between banks, you can still typically access your funds via ATMs and checks.  Don’t expect, however, to walk into the branch and get cash.

If, however, the bank is not immediately bought out, your ATM card will no longer work and your checks will not be cleared.  Within days, the FDIC will issue you a check for your total account balance, up to the insured amount.

If you have a home mortgage you will need to see who now holds the note.

Step #3: Continue Business As Usual

If your bank was purchased by another organization, once the doors reopen, you can continue with business as usual.

My Bank Closing Experience

I signed up for Netbank due to their generous sign up bonus.  I got $75 for each money market account and $75 for each checking account.  After getting each for my wife and I, we had $300 in bonus money. About a month later, I went to the Netbank website and saw a big notice that said they closed, or failed or something and the FDIC had taken over everything.

In my case, the purchasing bank was ING (now Capital One). Since I was already a long time banker with ING, they just asked for my account numbers.  Within the week, almost all my funds were safely in the ING account.  For some reason, when one of the accounts closed they sent a check instead of transferring the money.  Within 10 days, everything was back to normal, other than the fact that I was not using ING Direct exclusively for my online banking.

In this specific case, if a customer did not have an ING Direct account, one was automatically opened for them and they could then either continue to use ING or transfer that money to another bank account of their choosing.

Though initially a bank closure is a highly fearful thing, there is really very little to be concerned about as long as you have less than the FDIC insured balance.  In the worst case, you might go 10 days without access to your money.  Does that sound like terrible news?  Keep some money at home.

About the Author

By , on Mar 22, 2010
Craig Ford
Craig Ford is a fulltime missionary in Papua New Guinea who writes Money Help For Christians and Help Me Travel Cheap, a frugal family travel blog. He is the author of Money Wisdom From Proverbs, has a Masters of Divinity degree, and (most importantly) eats homemade pizza with his family every Friday night.

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Leave Your Comment (11 Comments)

  1. Pinyo says:

    @George, I am sorry to hear that. I know that if my bank fail, I would still be in a big mess even if I get all my money back. The big mess will be all the bills that I normally pay through the bank that get disrupted.

  2. George says:

    I was shocked this morning (April 7) when I received note that a bill payment from my account at Waterfield Bank was returned, I shortly found out that the bank had failed March 5. The only communication of any kind I had received from WB was my statement on March 4.
    I don’t know how much of this has been complicated because I currently live overseas.
    Now I see at the FDIC website that I had had 30 days to resolve my account issues. Naturally, these days have expired as I had no knowledge of the failure. Does anyone know what I can do? I’m hoping my savings still FDIC insured, but may be just a little more difficult to address. But I’m freaking out that I’ve just lost my entire savings.
    thanks for any input

  3. Kelsey B says:

    A lot of times, banks will have more than the FDIC insurance to back up funds. So instead of opening multiple accounts, you can also ask and see if the financial institution has additional insurance. I work in the credit union industry and know a lot of CUs have this. It protects those with more than $250,000 in an account.

  4. Ken says:

    Another thing to note when your bank fails and the FDIC issues you a check is that the FDIC will include both the principal and all accrued interest up to the day of closure (assuming the sum is under the FDIC limit).

    One thing that you can lose when a bank is closed is high interest rate on a CD. Even if the bank is purchased by another bank, the acquiring bank is free to lower the interest rate on the existing CDs. That can be quite painful these days.

  5. Actually.. come to think of it.. I did have a bank close on me, it was a credit union (Citizens Bank). I opened with them because they had a global chequing account (they don’t ding you for taking money out from ABM’s in foreign countries) AND because they gave you $50 for opening an account… but they closed down. I just took all my money out and I think I had like.. $0.09 left in there. It wasn’t much of a hassle, though they kept sending me my statement of $0.09.

    I do have ING and they are awesome- ING is solid, though I have never heard of Netbank.

  6. Craig Ford says:

    @kt – yes, let’s hope people never need to use this information.
    @youngandthrifty – I was actually surprised at how little hassle there was. Honestly, the personal stress in the process was the biggest thing. I think all I did was make one phone call and waited a few weeks.
    @Keith – ING is much, much better than Netbank. Well, I guess I was only with Netbank for a month or two before it went down so it is hard to say. I have been with ING for 6 years so I guess I’m an ING fan.

  7. Keith says:

    Interesting! For those who didn’t already have an ING account, do you think most would consider it an improvement over Netbank?

  8. Wow, good thing this worked out for you (that ING direct bought them out and you just needed to let them know)!

    Good advice- hopefully this doesn’t happen to any of my accounts though! =) (just the hassle)

  9. This is one of your best articles so far. Great job. A lot of people freak out about what happens to their money, but you are letting everyone know they are usually (almost always) in safe hands.

  10. Kristine says:

    Good value with the article! Thanks for sharing your experience so that we can learn from you!

  11. kt says:

    this has never happened to me or any of my friends but the information is to be filed away for future reference. you never know when you will need some good bank failure advice in the future :)

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