What to do if your bank fails

The FDIC protects depositors from failing banks.

Most FDIC-insured institutions are well-capitalized and well-managed, so it's unlikely that you will have deposits in a bank that fails. But it's common for people to ask, What should I know and do if I hear that my bank has been closed? We hope the following will answer your questions… and alleviate any concerns you may have.

Don't panic. Federal laws and FDIC practices are there to protect you. Federal law requires the FDIC to pay insured deposits — all the determined by the FDIC to be within the federal insurance limits — “as soon as possible” after an insured institution fails. In most cases, the FDIC makes insured funds available to depositors quickly, usually on the first business day after the bank is closed.

“While news that your bank has failed can be scary, federal law makes it clear that deposits within the federal insurance limits are completely safe,” says an FDIC Regional Ombudsman. “In addition, the FDIC works diligently — even before the bank is closed — to ensure that the event goes smoothly.”

She noted that the FDIC provides a special toll-free number consumers can call to speak with an agency representative, and that the FDIC's Web site also provides answers to frequently asked questions. “If you hear that your bank has failed, there is absolutely no need to run down to the bank or do anything other than to become familiar with how the FDIC will help you, as a bank customer, through the process.”

Most of the time, the FDIC is able to find a buyer for the failed institution. In this case, offices of the failed bank reopen under the name of the acquiring institution, usually by the next business day, and depositors automatically become customers of the new bank.

“Basically, the only immediate change you will see is a different name on the door,” said Kincaid. “Until you're notified otherwise, you can continue to use your checks, online banking, and and ATM cards. You should continue to make your payments on any outstanding loans, just like you did in the past. And don't worry about the contents of the safe deposit box you have at the bank. You can access the box, just as you would on any other business day.”

By law, the acquiring bank can lower the rate on your deposit account, but you also have the right to withdraw the money without penalty. Many closed banks had been paying above-market interest rates on CDs (certificates of deposit) and other accounts. If your bank fails and the deposits are acquired by another institution, the accrued interest on your account through the date of the closing will be paid at your same rate. However, after that date, your new bank has the right to reduce interest rates, subject to certain restrictions.

In particular, for CDs and other non-transaction accounts, the assuming institution cannot pay a lower interest rate than what it offers to its existing depositors for similar accounts. The assuming institution also must notify you of any changes it intends to make in the interest rate or other of your account.

“If you don't like the new terms offered, the good news is you can close your account without any early withdrawal penalty,” advised an FDIC Senior Deposit Insurance Specialist. “If you then decide to withdraw the money before maturity, you will receive your principal and the earned interest through the date of failure at your original interest rate, plus you will receive the interest accrued after the date of failure at the lower rate being paid by the acquiring institution.”

Don't dismiss the new bank just because of the rate reduction. It might offer other FDIC-insured deposit products to your liking or it may offer bank services that you didn't have before.

In the few instances when the FDIC is unable to find a buyer for the failed bank, depositors will quickly receive a check in the mail for their insured deposits — principal and accrued interest — up to the federal limit. “We try to have a check for the insured amount in the mail within three business days,” said Arthur Cook, an FDIC Resolutions and Closings Manager.

If you have money over the federal insurance limit, you become eligible to receive payments of some or all of the uninsured deposits based on how much the FDIC recovers by selling the failed bank's assets. While that process can take several years, most payments to uninsured depositors are made within a year or two of the bank failure.