Sixty nine banks have gone bust this year so far, and some additional big bank failures are reportedly on their way. More banks have gone bust this year than in the past decade, and it’s only August!
Luckily, because of the FDIC’s mechanisms to protect consumers, most people who deposit their money with failed banks are barely affected. Generally after a bank fails, the FDIC steps in with a team of people to continue running the failed bank and make sure business continues as usual until the assets of the bank are transferred to new owners or depositors. To see how the FDIC seizes a bank and makes sure depositors are protected, watch this Sixty Minutes video from earlier this year.
Despite the protections put forth by the FDIC, there are still some reasons that you should care if your bank is near failure or you're considering depositing money at a troubled bank. Here are a few ways that you can still be affected if your FDIC-insured bank fails:
You may lose money if you’re over the FDIC limits.
This concern is the most obvious, although many people still lose money when their bank fails because they didn’t understand the limitations on FDIC insurance. The FDIC only protects up to $250,000 per individual, so if you have more than this amount at a bank, you may lose money if it fails. There are ways to stretch this protection, such as putting money in specific types of separate accounts such as an IRA, a joint account with a spouse, or one with your children as beneficiaries. (See the FDIC insurance rules for extended coverage.)
You may also just get lucky - in 60 of the 69 banks that failed this year, the FDIC found a buyer for the failed bank that agreed to take over ALL regular deposits, not just the ones that were insured. However, you wouldn’t want to find yourself in one of those nine banks over the limits, and potentially lose lots of money.
You may lose a great CD rate.
When a bank fails, it’s possible the FDIC will not find another bank to take it over, and any funds you have in a CD may be sent to you as a check by the FDIC. It’s also possible that even if the FDIC finds another bank to take over yours, the new bank won’t honor a rate you had locked in for a long-term CD. In either case, this situation isn’t devastating, but it still can cost you serious money.
For example, let’s say you purchased a five-year CD last year at a 5% rate. If your bank goes under, you’ll get back the original money you invested in your CD along with accrued interest for the first year. However, if you wanted to buy a new CD for the remaining four years, you’d have to buy it at today’s rates which are much lower, topping out around 3%, meaning you’d lose 2% interest during the next four years for selecting a CD with a bank that failed. (That’s more than $8,000 lost on a $100,000 CD!)
Thus, be wary of locking in a great-rate CD with a bank that looks like it’s in bad financial health, because if the bank does fail, you may lose the lock on the rate. It’s generally safer to lock in a slightly lower rate with a bank in good health.
You may face logistical hassles.
Whether or not the FDIC has found a buyer for your bank, they generally make sure that the failed bank’s customers maintain access to their checking and savings accounts so there’s no major interruption in service. However, there can be some logistical hold-ups, like long lines or customer service snafus brought on by an increase in bank activity after it fails. (For example, read what happened when IndyMac failed in 2008, back when FDIC insurance only covered up to $100,000.)
In addition, there may be other reasons you may have to wait or be inconvenienced to get your money. For instance, if you purchased a CD at the failed bank through a broker like Schwab or Ameritrade, your broker has to first file your name with the FDIC to insure that you’re protected by insurance limits before they pay your broker. During this time, you usually can’t convert your CD to cash and you may lose interest on your money.
You may face other issues before a bank fails.
The three situations listed above are generally the most common ways consumers are affected when a bank fails. However, you can also be affected if your bank is generally unhealthy even if it hasn’t failed. When a bank is having trouble, it ultimately could be forced by the FDIC to lower its rates. The bank may also begin to have worse customer service or be less likely to invest in new technologies because it is cash strapped.
For all these reasons, it’s a good idea to be aware of your bank’s health. However, because of FDIC protections, it shouldn’t be a source of panic – a bank’s health should merely be another factor in choosing a bank, just as important as other considerations such as rates, fees, branch locations, account features, and customer service.
Due to the large number of failed banks in recent months, there's an important issue regarding FDIC insurance depositors need to be aware of. There are specific time limits within which an insured deposit or safe deposit box must be claimed, after which the funds or property are forfeited.
Depositors should also note that due to the large number of mergers and acquisitions in the banking industry over the years, it is possible they - either as owner or rightful heir of a deceased family member - might well be entitled to an account or safe deposit box at a bank that has failed, and not even know it.
More than 1,400 banks and 700 savings institutions closed in the aftermath of the Savings and Loan crisis of the 1980s. The current credit crunch has put more than 80 banks into FDIC receivership in just the last two years, including the largest ever - Washington Mutual (WaMu) - with many more certain to follow.
For an explanation of the rules for claiming insured deposits at banks that have closed, and a list of failed banks and those that they have acquired over the years - go to www.failedbankreporter.com
Posted by nupame -- Aug 6, 2009 5:56 AM
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