What Happens to Your Money in a Bank Failure?
Banks are the safest place to keep your money, but bank failures do happen. To protect yourself and avoid panic if your bank goes under, it's important to understand the situation and what you can do about it. The main thing to remember is that as long as your funds are insured by the Federal Deposit Insurance Corporation (FDIC)—and they likely are—then your money is safe.
What Causes Bank Failures
Banks fail when they're no longer able to meet their obligations. They might lose too much on investments or become unable to provide cash when depositors demand it.
Ultimately, failures happen because banks don't just keep your money in vaults. When you walk in and deposit cash (or deposit funds electronically), the bank invests that money. A simple form of investment is making loans to other bank customers so they can earn interest—and pay you interest on your deposits.
Banks also invest in much more complicated ways. If the bank takes large losses in any one area, it risks failing.
What Happens in a Bank Failure
Most US banks are FDIC insured. If your bank is one of them, then you can count on the FDIC to make sure you get your money in the event of a failure.
The FDIC's first choice is for a healthy bank to assume the insured assets of a failed bank. In some cases, this option is not available, and the organization will cut you a check for your insured deposits.
The FDIC does not publish a specific timeframe for resolving bank failures. The organization notes that historically, it has made funds available within one business day. They try to close banks down on Fridays and get back to "business as usual" by Monday morning. However, circumstances with a given bank failure or with your accounts can slow the process down.
The FDIC insures deposits up to $250,000, so keeping more than that at any bank may put your money at risk. However, it is possible to have more than $250,000 insured at one bank if several people or entities have an interest in the money. For example, retirement accounts and savings accounts for different family members can increase your protection. Take the time to understand FDIC limits if you have more than $250,000 at the bank.
For many customers, a bank failure is a non-event. They continue to use the checks, debit cards, and electronic transfer instructions that they used before the bank failure. At some point, customers may eventually get new checks and cards.
If you're not banking at an FDIC-insured institution, you're taking a huge risk. When these banks fail, the FDIC takes over. They may sell the bank to another (stronger) bank, or they may operate the bank for some time as a federally owned bank.
If you have uninsured deposits at an FDIC-insured institution, you may have a problem. The FDIC typically makes insured deposits available immediately after a bank failure, but uninsured deposits may not be available for years. The FDIC has to sell the institution and its assets and see how much money (if any) is left to distribute to creditors.
Sometimes bank branches are destroyed as a result of natural disaster or terrorism. Physical destruction is different from a bank failure. Again, if your accounts are insured the event is most likely just an inconvenience, and not something that will completely ruin you.
After a bank failure is announced, there is little reason to make a run on the bank, or withdraw your deposits, if your assets are insured. If the FDIC has already taken over, your money is no longer held by the weak and failing bank. If you want to get your money out and use a different bank, you can write a check or transfer your money electronically to the new bank.
If the FDIC has not found a successor bank, you will not have access to your money, and you'll have to wait for a check from the FDIC. In either case, there's nothing you can do after a bank failure is announced to affect how much money—if any—you'll lose.
Avoiding Bank Failures
It is difficult to know which banks will fail. The FDIC does not announce bank takeovers ahead of time. The best course of action is to make sure that you’re observing FDIC limits and not taking any risks.
Some bank rating services may help you avoid bank failures. These services look at banks’ strength, business models, and exposure to various risks.
You can also gain some insight by calculating your bank's Texas Ratio: divide the value of all non-performing assets by equity capital plus loan-loss reserves. If this ratio exceeds 100% then there's usually a greater chance that the bank will fail.
However, bank failures can be difficult to predict, especially by outsiders, so it's wise to keep your funds insured.
FDIC. "Your Insured Deposits," Accessed Dec. March 27, 2020.
FDIC. "A Borrower's Guide to an FDIC Insured Bank Failure," Accessed March 27, 2020.
Federal Reserve Bank of St. Louis. "The Great Depression: An Overview," Page xii. Accessed Dec. March 27, 2020.
Federal Reserve Bank of New York. "Resolving Too Big to Fail," Page 3. Accessed March 27, 2020.
FDIC. "Statistics at a Glance: As of December 31, 2019," Accessed March 27, 2020.
FDIC. "Deposit Insurance FAQs." Accessed March 27, 2020.
FDIC. "Payment to Depositors," Accessed March 27, 2020.
FDIC. "Frequently Asked Questions for Bank Customers in Areas Affected by Hurricane Florence," Page 5. Accessed Dec. 3, 2019.
FDIC. "When a Bank Fails - Facts for Depositors, Creditors, and Borrowers," Accessed March 27, 2020
Washington State Department of Financial Institutions. "Bank Rating Services," Accessed March 27, 2020.
Federal Reserve Bank of Dallas. "The So-Called Texas Ratio," Accessed March 27, 2020.