What happens when a bank fails? It’s a scary thing to think about, and unfortunately, it is all too common in today’s economy. In fact, almost 100 banks have failed in the US already this year. Thankfully, most banks are covered by the Federal Deposit Insurance Corporation (FDIC), which insures all bank deposits at member banks in the US.
In the event the bank fails, the money is guaranteed by the FDIC and depositors do not lose money. The FDIC was created to prevent people from making runs on their banks and causing banks to collapse when they were otherwise healthy. This was a HUGE problem in the Great Depression, and caused many banks to fail because people panicked about the overall economic situation and withdrew their savings – depleting the bank’s reserves and its ability to operate. Thousands of people lost their life’s savings – so the government stepped in to insure bank holdings to prevent a similar situation from happening again.
How does FDIC Coverage Work?
Banks are required to pay a small percentage of their holdings into a common fund, which acts as insurance for all members of the FDIC. Credit unions have a similar system called the National Credit Union Administration (NCUA). Until last year, the FDIC limits were $100,000, but the government upped the limit to $250,000 on a short term basis due to the sour economic climate. There was a fear some people were going to make a run on banks again, which would cause banks to lose deposits and force them to quit lending (which is what makes our economy go ’round). The government extended the $250,000 FDIC insurance limit until 2013, which gives people better security and insurance on their deposits. It’s great for consumers and the economy.
What happens when a FDIC Member bank fails?
When a bank fails, the FDIC swoops in and guarantees each account that has $250,000 or less in it. That amount is the limit for each of your accounts, not your total holdings, so you can have $250,000 of coverage in your savings account, in a joint savings account, in a CD, etc.
Watch the FDIC in action: I highly recommend watching the video in this article for a better idea of how it works: Watch the FDIC Takes Over a Bank.
The bank in this video failed, but none of the depositors lost any money.
Make sure your bank is covered by the FDIC!
There are thousands of banks out there, and the majority of them in the US offer FDIC insurance, or the NCUA for credit unions. But there are still some banks and credit unions that are not members. If your bank is not covered by the FDIC or NCUA your money is not covered in the event your financial institution fails. A little insurance goes a long way in keeping your money safe!
Where to find the best banks:
All of the best online banks are covered by FDIC insurance, and a quick search can give you a list of banks with the best interest rates. Then simply look for a bank that offers the features and convenience you desire.