Even though we’re in the eye of the hurricane, these days I’m an optimist.
So when I write a column on what to do if your bank fails, let’s not get alarmed. Chances are your bank is just fine. After all, the vast majority of U.S. banks are just fine, and only several dozen have crashed.
According to TheStreet.com’s database of bank failures, 42 U.S. banks have gone under since the beginning of 2008. Combined, the total assets at those banks were $380 billion. Approximately 252 additional banks are considered “problem institutions” by the Federal Deposit Insurance Corporation, through the fourth quarter of 2008.
But 42 banks did fail, and the fact that most banks don’t fail is little consolation to customers at Georgia-based Freedom Bank, the last bank that went into receivership. (If you want to know about others, be sure to check out TheStreet's ongoing series tracking new bank failures.)
So if your bank is either on the FDIC’s “problem child” list or if it fails more unexpectedly, it pays to have a plan to protect your assets. Hey, my job is to help you accumulate wealth, and a key cog in that machine is to keep preserve the assets you’ve already accumulated.
Before we get started, know that despite what you may have heard about the FDIC's own financial problems, the agency is solid and will not let you down if your bank fails. In fact, the FDIC never has let bank customers down since it was created by President Franklin Delano Roosevelt decades ago. The current FDIC chairperson, Sheila Bair, is tough as nails and is running the organization superbly, and under tense conditions. Ms. Bair won't let us down, as I know after looking her in the eyes during a recent town hall meeting I had with her on CNBC. She's the real deal, smart and realistic. She also has the situation, as bad as it is, under control.
With that in mind, start by finding out if your bank is covered by FDIC insurance. Under the FDIC umbrella, up to $250,000 in individual bank deposits is protected.
Even though the FDIC covers your bank deposits, it doesn’t cover all of your financial investments.
Here’s a list of what is insured under the FDIC statutes:
- Checking accounts
- Savings accounts
- Trust accounts
- Certificates of deposits (CDs)
- IRA retirement accounts
- Money market deposit accounts (in most cases)
Here’s a list of what is not covered by the FDIC:
- Mutual funds
- Life insurance policies
Even if your bank appears safe, as is likely the case, there are some key steps you can take to make sure that, even if your bank does fail, the asset bite won’t be too painful. A smart move is to spread your assets around to different banks, creating a network of FDIC-protected “umbrellas” that will shield your assets. For example, you could have $1 million in four different banks (in $250,000 increments) and be insured for the whole amount.
You can also double your coverage in one bank. All it takes is a strong marriage and deep pockets. Here’s how it works: You open an account and deposit $250,000, and your spouse does the same thing. That way your family has $500,000 in the same bank that is fully protected by the FDIC.
When your bank does fail, things happen fast. First, the FDIC won’t give you a warning. You have to keep checking the FDIC’s web site I gave you above. Otherwise, you’ll likely find out when a check you wrote bounces back (usually it’s stamped “bank closed”) or a bank debit or credit card is rejected (or maybe you'll read about it on TheStreet.com). When the FDIC gets involved, the failed bank can be closed on a Thursday or Friday and re-opened under new ownership the following Monday. In the case of the recently shuttered IndyMac bank, customers were even allowed to use their bankcards and bank ATMs the same weekend the bank was shut down (while the FDIC spent the weekend poring over IndyMac's records). But if your bank fails and you have more than $250,000 under deposit, you’ll have to stand in line until the FDIC does its version of a forensic audit. Even then, there’s no guarantee you’ll get all your money back—only the amount that’s protected by the FDIC.
That’s why I want you to check out TheStreet.com’s bank credit ratings screener. That way, you at least get some advance notice that your bank is in financial trouble.
Normally, when a bank fails, the FDIC is usually able to find another bank to take over right away (in the IndyMac bank case, the FDIC reopened the bank under its control, calling it IndyMac Federal Bank). But if no takeover candidate is found, the FDIC will let you know. It may take a week longer to then be reimbursed by the FDIC. But you’ll still get your money back, again, up to $250,000.
When a new bank takes over, they’ll get in touch with you right away, usually in the form of a packet mailed to your house. Make sure to check the terms for your checking and savings accounts, or any bank CD investments. Read up on the terms, fees and interest rates they offer. Make sure you’re aware of any minimum account balances—any shortage there and you might be slapped with extra fees for not having enough money in your account. If you have a credit card with the bank, make sure to check that the terms, i.e. payment dates, interest rates, credit limit, remain the same. Any changes you miss could result in late payments and added fees.
One important note: If you have a mortgage loan or other installment loan with your bank, and it goes belly up, keep making the payments. Just make sure to check that the address is the same, as it might change. The same goes for any online payment web sites you might be using.
Hey, banks may fail. But that doesn’t mean your finances have to. Keep a cool head if your bank goes under, and apply the tips I outlined above.
Consider that your bank failure survival guide. Here's hoping you won't need it.
—Brian O’Connell contributed to this article.