Have you ever wondered how the Federal Deposit Insurance Corporation (FDIC) takes over banks when they are failing? The process, called the FDIC Resolution Process, is a very orderly process that happens in a short period of time. It is in the best interest of all parties, including the government, for a bank in trouble to turn things around instead of failing.

History of the FDIC

The FDIC Resolution ProcessBefore we get into the FDIC resolution process let’s first get some background on the FDIC. The FDIC was created in 1933 during the Great Depression. The FDIC and the FDIC’s deposit insurance fund was created to insure deposits.

Prior to the FDIC deposit insurance fund, if a bank you had deposits in failed, you lost your money. The deposit insurance fund is funded by the banking industry and is used to insure deposits at banks. The fund guarantees depositors won’t lose any money if a bank fails.

During the Great Depression, not only unhealthy banks failed but healthy banks failed as well. The reason being that depositors had no idea which bank would fail next. Fear of losing their money prompted depositors to withdraw their all of their money, a scenario known as a “run on the bank.”

Run on the Bank

A run on the bank happens because banks normally keep a small percentage of their assets in cash. When depositors withdraw a large amount of cash, the likelihood of a bank’s failure also increases, causing more depositors to withdraw money.

It’s a vicious cycle that generates its own momentum and before you know it, a bank can fail because it has run out of cash. To make it easier to envision, imagine if you were suddenly expected to pay off your mortgage, student loans, car loans, and credit cards in their entirety on a moment’s notice.

A run on the bank is a frightening scenario for any depositor but you don’t have to worry about losing your deposits in a FDIC insured bank. Since the FDIC’s inception in 1933, not a single depositor has lost any of their insured deposits.  Before the Great Recession of 2008/2009, the insured deposit limit was $100,000 but that was increased to $250,000 and made permanent in 2010.

It’s a good thing that the insured deposit amount increased during the Great Recession because many banks failed during that time. As you can see from the list of bank closures below, 161 banks failed in 2010 and only five banks failed in 2016.

Number of Failed Banks The Past 10 Years

  • 2008 – 30 banks
  • 2009 – 140 banks
  • 2010 – 161 banks
  • 2011 – 92 banks
  • 2012 – 50 banks
  • 2013 – 24 banks
  • 2014 – 18 banks
  • 2015 – 8 banks
  • 2016 – 5 banks
  • 2017 – 8 banks

See an updated list of banks at FDIC Failed Bank List.

FDIC Resolution Process

When it becomes clear a bank is failing, the government gives a bank 90 days to recapitalize itself or sell itself to another bank. If a bank is unable to do this, the FDIC resolution process starts which entails the sale of the bank with three goals in mind.

  1. Keeps its promise to insure deposits.
  2. Minimize disruption to the bank’s depositors and local community.
  3. Resolve the bank at the least cost to the deposit insurance fund.

A team of experts from the FDIC analyzes and assesses the condition of the failing bank. This team also estimates the liquidation value of balance sheet assets and liabilities. The team also looks at several other factors to come up with a marketing plan. After creating a marketing plan, the FDIC identifies potential buyers.

FDIC Resolution Plan

The FDIC steps in and implements it’s plan if the bank has failed to get its act together or sell itself within the 90 day period,. This is when the FDIC resolution process plan starts. Qualified bidders are asked if they are interested in purchasing the bank. Only banks with good ratings, adequate size, and regulatory approval are allowed to bid.

Qualified bidders are given access to financial information and the transactions that are being sold. After the due diligence is done, bidders submit three-part bids. The premium the bidder is will to pay for the deposits. The amount the bidder is willing to pay for the assets and will the bidder will assume all deposits or only insured deposits.

The FDIC reviews all the bids and selects the best bid for the deposit insurance fund. The FDIC is mandated by law to accept the best bid. The best outcome is when a bidder assumes all the deposits and as much of the assets as possible. That way depositors have uninterrupted access to their deposits and all loans are managed over time by the private sector to maximize potential recovery.

The FDIC has perfected this process and does it in a very orderly fashion. Even though deposits are insured, when word gets out that a bank has failed, depositors still rush to the bank to withdraw their money.

Failed Bank Report on 60 Minutes

In a 60 minutes below you will see a long line of people in front of IndyMac Bank. This happened when word got out that the bank failed. In one scene, a man comes into a branch with an empty briefcase. His intention is to withdraw all his money. After speaking with FDIC officials he decides to leave his money in the bank and leaves with his briefcase empty.

Chances are you will never have your money deposit at a failed bank. But if you do, hopefully you now have a better understanding about the process and feel more secure about it.

Another point to stress, only deposit your money in accounts at banks that are insured by the FDIC. Also make sure you keep the deposit amount under the $250,000 limit. You will lose anything over that amount if your bank has failed.

What if you have over $250,000 to deposit or millions of dollars to deposit? There are several companies, like Reich & Tang Insured Deposits, that can distribute your money to many banks so your deposits are fully insured. Although these accounts are also insured, the CD rates offered for this type of service are usually lower than CD rates you will get directly from a bank.

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