Banks can and do sometimes fail. The “safest place to keep your money” may stop doing business, but investors who select banks insured by the FDIC (Federal Deposit Insurance Corporation) are protected up to $250,000. When a bank runs into financial trouble the FDIC will intervene on behalf of the banks customers.
How does the FDIC intervene?
In the large majority of cases the FDIC waits until Friday evening to close down a troubled bank, to avoid a disruption during the business week. Once they do so they make a press release stating that the bank is being shut down, the FDIC has been named as the receiver and will protect the insured portion of investors accounts.
How long before you get your money?
The FDIC does not disclose exact time frames for dealing with bank failures. It indicates that the goal is to “make deposit insurance payments within two business day(s) of the failure of the insured institution”. In reality however, when the bank can be quickly sold to another financial institution (which is normally the case) there is little to no affect on customers of the bank for the insured portion of their funds (currently up to $250,000).
The bank shuts down on Friday and reopens on Monday. Customers can continue to make deposits, transfers and write checks without interruption. In the cases where the bank can’t be sold, the FDIC will mail checks for the insured portion of client funds out to them, which also generally happens on the Monday after the bank is closed. ATM cards will stop working and checks which did not clear before the bank was closed will bounce.
What about deposits over the insurance limit?
FDIC insurance extends up to $250,000 to cover both principal and interest generated in a covered account. If you hold more than $250,000 at a bank which fails, the money owed to you over the $250,000 limit will be listed along with other creditors of the bank. The FDIC has to sell the bank and its assets to determine how much money is left to distribute to creditors, a process which can take a significant amount of time.
The good news is that you are a “top tier” creditor meaning that you get paid before bondholders of the bank for example. Generally you also still get a large portion of your money back as well, according to the FDIC the average rate of recovery is $.72 of every uninsured dollar when a bank fails.