What happens when a bank fails? Is your money lost, never to be recovered? What about any special accounts, CDs or other benefits? Knowing what goes on when a bank fails can help you be prepared in case the worst should happen.
A bank failure occurs when a bank is formally closed by a federal or state banking regulatory agency. In most cases, a bank closure is the result of the bank in question being found incapable of meeting its obligations to depositors and other parties. Most banks are insured banks, meaning they are insured by FDIC. This includes all banks chartered by the federal government and most by state governments.
The FDIC maintains a deposit insurance fund, which is made up of premiums paid by insured banks and interest earnings on the FDIC's investment portfolio of U.S. Treasury securities. When a bank fails, the FDIC pays insurance to the depositors up to the insurance limit, which is generally $250,000 per depositor per insured bank.
The FDIC then acts as the "receiver" of the failed bank and takes on the task of selling/collecting the assets of the failed bank and settling its debts. These include claims made against the bank for deposits that are over the insurance limit. When accounts at a bank are closed due to bank failure, the FDIC will notify each depositor in writing using the depositor's address on record with the bank. The notifications are mailed immediately after the bank closure.
The main thing to be concerned about when your bank fails is that you may have to wait a while before you receive your money. Because of this, and if you have more than $250,000 in savings, it is advisable to have at least two bank accounts with separate banks to ensure that you always have available funds.
When a bank fails, the Federal Deposit Insurance Corporation (FDIC) has insured accounts up to a certain amount. But what if you have your money invested with a brokerage firm? That's where the Securities Investor Protection Corporation (SIPC) comes in.