What happens when a bank fails?

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Bank failures may sound scary, but they're rare occurrences. Even if your bank fails, you may still have rights to your deposited money if it's a federally insured bank. Understanding what happens to your money when a bank fails will show you how to get your funds back.

What is a bank failure?

A bank failure occurs when a financial institution can't meet its obligations. This happens when:

• The bank doesn't have enough funds to cover withdrawals
• The bank owes more than it has
• The bank doesn't have enough cash or easily sellable assets on hand
• The bank can't turn its investments into cash quickly without significant losses

Here's a key point to remember: Banks don't just sit on your deposited money. They often use it for loans and investments. If economic conditions negatively affect their market returns or a large number of customers fail to pay back their loans, the bank could find itself in hot water.

Recent bank failures

There have been several recent bank failures.

• 2023: Citizens Bank in Iowa (not the national Citizens Bank), Heartland Tri-State Bank, First Republic Bank, Signature Bank, and Silicon Valley Bank all failed
• 2024: Republic Bank in Pennsylvania closed its doors

The FDIC stepped in for all these cases, covering both insured and uninsured deposits.

According to the FDIC, they've learned that banks relying too heavily on uninsured funding are more vulnerable to failure. The FDIC is also considering whether to examine or capture different kinds of data to detect risky behaviors better before a bank is at risk of failing.

How FDIC insurance protects your money

The FDIC, established in 1933, helps instill more stability in the banking industry by keeping an eye on banks and offering insurance to depositors.

The FDIC monitors banks for financial or operational weaknesses that may lead to insolvency. It uses a rating system based on factors such as earnings, liquidity, asset quality, and access to capital.

If a bank fails, the FDIC can either arrange for another bank to take over or take over the bank itself and pay depositors directly, up to $250,000 per person, per account type — that’s the maximum amount the FDIC insures. Remember, only certain accounts are insured, including savings, money market, checking, and certificates of deposit.

Understanding FDIC insurance limits

If you have more than $250,000 on deposit, don't panic. The FDIC will cover the first $250,000 immediately and issue a claim for the remaining amount, which you can follow up on once the bank's assets are liquidated. However, you might be able to protect even more.

The FDIC insures up to $250,000 per depositor, per ownership category at each bank. This means if you have different types of accounts or ownership structures (like individual accounts, joint accounts, or retirement accounts) at the same bank, each category is insured separately.

For example, if you had $250,000 in your personal savings, another $250,000 in a joint account with your spouse, and $250,000 in an IRA at the same bank — all $750,000 would be fully insured. Understanding these categories can help you maximize your FDIC coverage and potentially protect all your deposits.

What happens to your money when a bank fails

When a bank fails, what happens to your money will depend on the type of account you have and how much is held there. The first step that happens is you’ll receive an immediate notification from the FDIC.

For any accounts that another bank has taken over, the new bank will inform you about the status of your accounts and any steps you can take. The FDIC will also take steps to inform the public about a bank failure.

If a new bank took over, you should be able to access your money there. Transactions like direct deposits should automatically go to the new bank. Otherwise, you’ll need to wait for directions from the FDIC, like when you should expect your money from your deposit accounts.

For any loans at the failed bank, a new loan servicer will work with you to handle payments. Before a new financial institution takes over, the FDIC will handle the loans.

Steps to take after a bank failure

Chances are, you’ll be offered guidance and steps to take once you’ve been notified of a bank failure. Here’s what you should do:

1. Check your other available funds: See what you can access while you wait for the FDIC to issue payments.
2. Verify which of your accounts are insured and for how much: For example, if you have $250,000 in a savings account with you as the sole owner and $6,000 in a checking account jointly owned by you and your spouse, you may be entitled to receiving all of it.
3. Update any bill payments linked to the failed bank: If you pay bills using an account from a failed bank, you’ll need to use another form of payment. This is especially important if you use the account for recurring payments. Switch them if necessary as soon as you can to prevent any payments from failing.
4. Continue making loan payments as directed: With loans, the FDIC may take over, and you’ll continue your payments as usual, though they could be with a different bank once the loan is sold.
5. Consider spreading your deposits across different banks: You may also want to consider spreading out your deposits with different banks in the future so that not all of your money is held up with one financial institution. For example, you could have a checking and savings account for short-term goals in one FDIC-insured bank and another savings account for your emergency fund in another.

George R. Gagliardi, a certified financial planner, advises, “It’s important not to panic. Banks have failed before, massively back in the 1980s, and the country got through it. We’ve seen fewer failures over the years.”

Frequently asked questions

The bottom line

The FDIC insures your deposits up to $250,000 per account type and ownership type at an FDIC-insured bank. This protection can give you peace of mind even if your bank fails. Stay informed by keeping up with FDIC updates to understand how your money is protected and to know your bank's status.

Remember, while bank failures can be unsettling, the systems in place are designed to protect your money.

Editorial disclosure: Opinions expressed are author's alone, not those of any bank, credit card issuer, or other entity. This content has not been reviewed, approved, or otherwise endorsed by any of the entities included in the post.