How Soon Will You Receive Your FDIC-Insured Money After a Bank Failure?

If you have money deposited in a bank, you may be wondering what would happen to your money in the unlikely event, though more likely recently, that the bank goes out of business. Fortunately, the Federal Deposit Insurance Corporation (FDIC) has a plan in place to protect insured depositors in such an event.

There are two main ways that the FDIC can resolve a closed bank. The first is through a Purchase and Assumption Transaction, in which a healthy bank assumes the insured deposits of the failed bank. Insured depositors of the failed bank immediately become depositors of the assuming bank and have access to their insured funds. The second option is a Deposit Payoff. When there is no open bank acquirer for the deposits, the FDIC will pay the depositor directly by check up to the insured balance in each account.

Federal law requires the FDIC to make payments of insured deposits "as soon as possible" upon the failure of an insured institution. Recent FDIC publications also mention "within two days" or "the next business day". While every bank failure is unique, there are standard policies and procedures that the FDIC follows in making deposit insurance payments. It is the FDIC's goal to make deposit insurance payments within two business days of the failure of the insured institution.

If you have placed money at the failed bank in the name of a trust, the FDIC may request the owner or trustee of the trust agreement to provide the FDIC a current copy of the trust document which the FDIC would review to confirm the applicable amount of deposit insurance coverage.

If you have placed money at the failed bank through a fiduciary, the FDIC will typically need to obtain from the fiduciary supplemental information such as a list of the owner or owners of each deposit and the dollar interest of each owner in the deposit account. The FDIC will pay the deposit insurance coverage to the fiduciary. In turn, the fiduciary will be responsible for distributing the deposit insurance payments to their customers.

The FDIC's insurance coverage includes principal and interest through the date of the bank failure up to applicable insurance limit for each deposit. The accrual of interest ceases on all accounts once the bank is closed. If an open bank acquires deposits from the failed bank, the acquiring bank becomes responsible for re-establishing interest rates and beginning the accrual of interest after the date of the failure of the bank.

If the failed bank is acquired, all direct deposits, including Social Security payments, will automatically be re-directed to the deposit accounts at the acquiring bank. If there is no acquiring bank, the FDIC typically attempts to find a nearby bank to take over the direct deposit function temporarily, to make Social Security and other government annuity payments available to the customers.

When the failed bank's deposits are assumed by an open bank, some or all of the offices typically reopen the next business day and there is usually no interruption in the processing of checks drawn on the failed bank. An exception to this procedure may include checks that were drawn against a deposit account that has been determined to be uninsured or an account that the deposit insurance determination is pending.

If there is an acquiring bank, it will accept the checks and deposit slips of the failed bank for a short time. You will receive information about new checks and deposit slips from the acquiring bank.

When the failed bank's deposits are assumed by a healthy bank, the branch offices usually reopen the next business day. At that time, you will have access to your safe deposit boxes. In the event of a depositor payoff, the FDIC will send a letter to you informing you of the closing. The letter will instruct you on how you can remove the contents of your box.

If you have more than $250,000 in a closed bank and you are paid $250,000 by the FDIC, you would receive a claim against the estate of the closed bank for the remaining money which is not insured. In this case, the depositor would be given a Receiver's Certificate as proof of this claim and would receive payments as the assets of the bank are liquidated.

A few banks failed in 2023 and all it was decided to cover all deposits regardless of the amount. This has sparked discussions about the potential for legislative changes to increase the insured deposit amount beyond the current limit. The last time was deposit amount was increased was during the financial crisis of 2008/2009, then the limit was raised from $100,000 to $250,000.

Author: Brian McKay
May 4th, 2023