When Banks Fail, Your Money Will Still Be There on Monday, I Hope

To life’s certainties, like death and taxes, you can add one more: banks fail.

Through November 7 of this year, 17 banks have failed and been taken over by the Federal Deposit Insurance Corp. (FDIC). From 2009 through 2013, 474 banks failed.

But take it from me -- one who once was employed by Washington Mutual, the largest bank failure in U.S. history, and Indymac Bank, the third largest bank failure in U.S. history, it’s not that big a deal from a customer’s standpoint.

Employees are the ones who really eat it. Wondering where your next job is coming from is a lot tougher emotionally and physically than wondering what’s going to happen to your accounts at your expired bank.

To allay your fears and put your worst nightmares to rest, I’m going to tell you what actually does happen and what you need to do in the event your bank fails.

Why banks fail in the first place

Banks just don’t sit on that money that you deposit with them. They invest it, hoping to get a greater return on their investments than the interest they pay you. But sometimes, those investments go horribly wrong, and when you as a depositor want your money, and your bank doesn’t have it or has to strain to come up with it (a stress test), that’s bad news. If word gets out that your bank is undercapitalized, other depositors want to withdraw their money too, creating a “run on the bank.”

That’s essentially what happened to Indymac Bank in 2008 after Sen. Charles Schumer (D-N.Y) fretted publicly about the bank’s level of capital reserves. In this case, word didn’t just leak out, it was broadcast across the nation.

The Office of the Comptroller and its oft-appointed receiver, the FDIC, have all kinds of tools, yardsticks and metrics to help them decide when to shutter a bank like Indymac. It’s not an exact science as to when to seize a battered bank (the bank could bounce back given sufficient time and help), but suffice it to say, bank failures happen and will continue to happen.

My concern here is outlining for you how to respond if your bank closes.

The announcement that your bank has failed

Whenever there’s bad news to announce, the rule is to do it on a Friday, when the public is thinking about a couple of well-deserved days off, not the safety of its money. So the FDIC nearly always announces bank closings on a Friday. It never gives advance notice because, of course, that would create a run on the bank.

First things first -- your insured deposits

If you have $250,000 or less in your account, you can relax, you have nothing to worry about.  That money could be deposited in a checking, savings, money market deposit account or a certificate of deposit. But actually your protection could extend beyond the $250,000 cap. The FDIC’s language actually states that the standard insurance amount is “$250,000 per depositor, per insured bank, for each account ownership category.”

So, in other words, you could have $250,000 in an individual account. Your wife and child could also have $250,000 in separate accounts. That’s a total of $750,000. Plus, you and your wife could have a joint $500,000 account, bringing your total to $1,250,000 and it would all be FDIC-insured. And you could also have more insured money squirreled away in retirement and trust accounts!

But if you exceeded the $250,000, per depositor, per account limit, in one of your accounts, then you have some worries. Say you had $300,000 in a savings account. The FDIC would make your $250,000 available immediately, but you might not see all or a portion of your other $50,000 for days or years -- not until the FDIC was able to sell the failed institution and its assets and see how much money, if any, was left to distribute to you (now a creditor).

Another way you could exceed the limit is if you had a brokered account. If, for example, you had a $200,000 CD with your bank and another $200,000 with your stockbroker, who happened to purchase a $200,000 CD in your name at the same bank, you would have a total of $400,000, so $150,000 would be uninsured deposits. In exchange, you would obtain a receivership certificate for $150,000 that you would use later to get any additional money from the liquidation of the receivership.

There’s one more scenario worth mentioning, but this time you’re totally protected. Should your deposits be transferred to the acquiring institution, where you already have an account, and the transfer takes you over the $250,000 limit, the transferred money will be separately insured for six months, giving you ample time to allocate the money into another FDIC-insured account or some other financial instrument.

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Everything else is small change

Once you can breathe easy that your money is safe and insured, everything else is pretty much small potatoes. Most likely, the FDIC is going to find a buyer for your bank, because the FDIC will sweeten the deal enough to attract a bid, perhaps from a bank in your region looking to expand. So chances are the bank you knew by one name on Friday will have a new name on Monday, and it will be business as usual. Your customer experience might even improve depending who acquires your failed bank, but most importantly, the change will appear fairly seamless.

Let me illustrate this point across a few key banking services:

ATMs: The FDIC might pull them offline over the weekend while the systems are switched out, but you’ll still be able to access your funds. The activity, however, might not show on your account until Monday.

Debit cards: Similarly, you can continue to swipe away, but keep track of your transactions because they might not post right away.

Checks: Your checks will be processed as usual. All outstanding checks will be paid against your available balance(s) as if no change had occurred. Your new bank will eventually contact you regarding any changes in terms of your account.

Online services: Access will likely be switched off over the weekend, but should be online on Monday when the bank reopens.

Credit cards: They’ll continue to work, at least until you hear something from the acquiring institution. Banks regard credit cards as assets, so while they could change terms, they likely won’t because they don’t want to lose your business, especially if you’re somebody who doesn’t pay off the balance each month. Whatever you do, don’t stop making payments just because your old bank is defunct.

Loans: The same goes for outstanding loans you might have. Keep making those payments to the same address until further notice. When you signed your loan papers, you promised to keep paying, regardless of who owns your loan.

IRAs: Retirement accounts are transferred in their entirety and insured.

CDs: These are insured separately until the earliest maturity date after the end of the six-month grace period. If your CD matures during the grace period, you can renew it for the same term and the same amount unless you close the CD. The grace period gives you the opportunity to restructure the accounts, if you wish. You may also withdraw funds from any transferred account with an early withdrawal penalty.

Bank closings not a death sentence

As you can see, bank closings have become old hat, especially for the FDIC. Over the years, they have supervised countless closings and re-openings with little disruption to customers. If a bank failure directly affects you, relax and say, “So what else is new?”

While a bank closing is largely an inconvenience for customers, it can can be a real pain in the pocketbook for employees. I know.

Come to think of it, if I’m ever employed by a bank again and am cut loose because the bank failed, I’m going to send my resume to the FDIC.

This institution never seems to suffer from a shortage of work. It’s the closest thing I know to guaranteed employment!