Dozens of banks have failed this year. What do you need to know if yours is next?
The number of bank failures has reached 106 since January — more than four times the total for 2008 and the most since the savings and loan crisis in 1992. And most experts expect problems caused by unpaid loans to force many more closures in the coming years, mostly among small, community-based banks.
Banks are typically shut down late Friday afternoon. That gives the Federal Deposit Insurance Corp. time over the weekend to handle the shutdown, which most often involves transferring deposits to another bank that is taking over the failed institution. The first sign of failure consumers see may be a closure notice on the bank's door.
The impact of the bank failures on consumers has been minimal, but rumors about what can happen are rampant. The FDIC has also warned of dozens of scams that try to take advantage of consumers who don't understand the process.
So what do bank customers need to know, in case their bank goes under?
Here are some questions and answers.
Q: Why would a bank be closed by regulators?
A: State or federal regulators can decide to close a bank if it is in danger of being unable to meet its obligations to depositors and others — basically, if it looks like it's going to run out of money.
Most of the banks closed in the past year have suffered because the housing crisis and the recession have led consumers and businesses to stop paying off mortgages, credit cards and other loans. Banks must set aside money to cover such losses, and they become unstable if these reserves fall.
Q: How does a customer know if a bank is covered by FDIC insurance?
A: Banks usually have a sign on the door with the FDIC logo, and also frequently use the logo on account statements and other correspondence.
The FDIC has a tool called "Bank Find" on its Web site, http://www.fdic.gov, where a customer can enter a bank name and address to make sure it is insured. Internet-based banks are eligible for FDIC insurance, and are listed on the Web site as well.
Q: What exactly does the FDIC insure?
A: The FDIC covers money deposited in savings accounts, checking accounts and certificates of deposit up to $250,000. But that limit can apply to the same person in several different ownership categories, like single, joint, held-in-trust and retirement accounts.
So, for example, if a woman has two savings accounts totaling $200,000 in her own name, plus two joint accounts that each have $100,000, plus two accounts with $75,000 held in trust for her children, and a $90,000 IRA, all of these deposits would be covered because no one ownership category tops the limit.
Q: What doesn’t the FDIC insure?
A: Money in mutual funds, annuities, stocks, bonds or other investment products is not covered, even if those investments were bought through an insured bank.
The contents of a safe deposit box are also not FDIC insured, but may be covered through a homeowner's or renter's insurance policy.
When a bank fails, in most cases, the bank that takes over will keep branches operating and allow access to safe deposit boxes. If no other bank acquires the failed bank, the FDIC will send a letter to boxholders with instructions for removing their property.
Q: How long does it take for the FDIC to pay people back?
A: In most cases, another bank takes over the closed bank's deposits, and ATM cards, debit cards and checks continue to work until the new bank transitions customers to its systems.
If the FDIC can't find another bank to take over, the agency uses its insurance fund to make payouts to the failed bank's customers. The law requires that deposits be paid out "as soon as possible" after an insured bank fails. That has typically been just a few days after the bank closes. In most of these cases, the FDIC will provide new accounts at another insured bank, but it will issue a check to each depositor if new accounts can't be arranged.
Q: Will the FDIC contact customers of a failed bank?
A: The FDIC notifies each depositor in writing when a bank fails, using the depositor's address on record with the bank. This notification is mailed immediately after the bank closes. The FDIC never sends e-mails directly to consumers, and has warned about numerous scams sending fraudulent e-mails that appear to be sent by the agency. The FDIC also sets up a toll-free number and a Web site for customers to access.
When the failed bank is acquired by another bank, depositors get a notice in the mail from the new bank as well, usually with the first bank statement after the takeover.
Q: What if someone "banks" at a credit union?
A: The National Credit Union Administration, a U.S. government agency, provides members of these nonprofit institutions insurance up to $250,000 through the National Credit Union Share Insurance Fund, much the way the FDIC covers bank deposits. So far this year, 19 credit unions have failed.
Like the FDIC, the NCUA will assume control over a federal credit union that is unable to continue operating on its own, if it cannot find another credit union to serve the failed institution's members. There are a handful of state-chartered credit unions that are not covered by NCUSIF, but have their own insurance.