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Understanding FDIC Insurance: What Happens When A Bank Fails?

The FDIC provides insurance to deposit accounts such as savings account, CDs and even checking accounts. However, there are limitations.
Author: Baruch Mann (Silvermann)
Baruch Mann (Silvermann)

Writer, Contributor

Experience

Baruch Silvermann is a financial expert, experienced analyst, and founder of The Smart Investor.  Silvermann has contributed to Yahoo Finance and cited as an authoritative source in financial outlets like Forbes, Business Insider, CNBC Select, CNET, Bankrate, Fox Business, The Street, and more.
Interest Rates Last Update: April 15, 2024
The banking product interest rates, including savings, CDs, and money market, are accurate as of this date.
Author: Baruch Mann (Silvermann)
Baruch Mann (Silvermann)

Writer, Contributor

Experience

Baruch Silvermann is a financial expert, experienced analyst, and founder of The Smart Investor.  Silvermann has contributed to Yahoo Finance and cited as an authoritative source in financial outlets like Forbes, Business Insider, CNBC Select, CNET, Bankrate, Fox Business, The Street, and more.
Interest Rates Last Update: April 15, 2024

The banking product interest rates, including savings, CDs, and money market, are accurate as of this date.

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Table Of Content

What Is FDIC Insurance?

FDIC insurance, or the Federal Deposit Insurance Corporation insurance, is a government-backed program that provides deposit insurance for bank customers in the United States. It was created in response to the banking crisis of the 1930s, to restore trust in the banking system and prevent bank runs.

FDIC insurance covers deposits made by individuals, businesses, and other entities in participating banks, up to a certain limit. As of 2024, the standard insurance limit is $250,000 per depositor, per bank. This means that if you have multiple accounts in the same bank, the total insurance coverage is still limited to $250,000. If you have accounts in different banks, each account is insured separately up to $250,000.

FDIC insurance covers deposits in savings accounts, checking accounts, money market accounts, and certificates of deposit (CDs). It does not cover other financial products, such as stocks, bonds, mutual funds, or annuities.

What Are The Limitations of The FDIC Coverage?

There are several limitations to FDIC insurance coverage that depositors should be aware of:

  • Coverage Limits: FDIC insurance is limited to a maximum of $250,000 per depositor, per bank, for each account ownership category. If a depositor has accounts in multiple banks, each account is separately insured up to the $250,000 limit. However, if a depositor has multiple accounts in the same bank, the total insurance coverage is still limited to $250,000.

  • Account Ownership Categories: The amount of FDIC insurance coverage depends on the ownership category of the account. The most common ownership categories are single accounts, joint accounts, revocable trust accounts, and certain retirement accounts. Depositors should be aware of the ownership categories and how they affect their FDIC insurance coverage.

  • Exclusions: FDIC insurance does not cover all types of bank deposits. It does not cover losses due to fraud or theft, investments that are not deposits, or losses in foreign banks. Additionally, deposits in certain types of accounts, such as trust accounts that do not meet certain requirements, are not insured.

  • Coverage for Large Deposits: Depositors with more than $250,000 in a single account or ownership category may be at risk of losing some or all of their uninsured funds if the bank fails. However, there are ways to maximize FDIC insurance coverage for large deposits, such as opening accounts at multiple banks or using CDARS (Certificate of Deposit Account Registry Service).

  • Bank Membership: Not all banks are FDIC-insured. To be insured, a bank must be a member of the FDIC. Depositors should verify that their bank is FDIC-insured by checking for the FDIC logo or searching the FDIC's online database.

understanding FDIC insurance
FDIC insurance covers deposits in savings, checking, money market accounts, and certificates of deposit (CDs).

How Does FDIC Insurance Work If A Bank Fails?

In general, FDIC insurance protects depositors in case their bank fails. If your bank fails and is unable to return your deposits, FDIC insurance will reimburse you up to the insured limit.

If a bank that is insured by the FDIC fails, the FDIC takes over the bank's operations and works to pay off depositors' insured deposits. Here's how the process typically works:

  1. Bank Failure: The first step is for the bank to fail. This usually occurs when the bank becomes insolvent, which means it does not have enough assets to cover its debts.

  2. FDIC Takes Over: When a bank fails, the FDIC takes over the bank's operations and becomes the receiver of the failed bank. The FDIC will then review the bank's records to determine the amount of insured deposits and the amount of assets available to pay off depositors.

  3. Deposit Insurance Payment: The FDIC will then begin the process of paying off depositors' insured deposits. Depositors will typically receive a check for their insured deposits within a few days of the bank's failure. The FDIC may also arrange for the transfer of accounts to a healthy bank.

  4. Uninsured Deposits: Depositors with uninsured deposits, such as those over the FDIC coverage limit or in accounts that are not covered by FDIC insurance, may lose some or all of their deposits. However, the FDIC will attempt to recover as much of the failed bank's assets as possible and distribute them to depositors.

  5. Resolution of Failed Bank: The FDIC will also work to resolve the failed bank. This may involve selling the bank's assets, restructuring the bank's operations, or liquidating the bank.

It's important to note that the FDIC typically pays off insured deposits relatively quickly, often within a few days of the bank's failure.

However, it may take longer to resolve the failed bank and recover assets for depositors with uninsured deposits. Depositors can check the FDIC's website or call the FDIC's toll-free hotline for more information on a particular bank's status and the status of their deposits.

Historical Examples: How's The FDIC Reacted When Bank Failed?

there have been many historical examples of how the FDIC insurance works when a bank fails. Here are a few notable examples:

  1. IndyMac Bank: In 2008, IndyMac Bank, a California-based bank, failed and was taken over by the FDIC. The FDIC paid out more than $8 billion in insured deposits to over 100,000 depositors. The bank's assets were transferred to OneWest Bank, which continued to serve IndyMac's customers.
  2. Continental Illinois National Bank and Trust Company: In 1984, Continental Illinois, one of the largest banks in the United States, failed. At the time, it had $40 billion in assets and $1 billion in uninsured deposits. The FDIC intervened and worked to stabilize the bank by injecting $4.5 billion and restructuring its operations. The FDIC also honored all insured deposits, which amounted to $3.5 billion at the time.
  3. Colonial Bank: In 2009, Colonial Bank, a large bank based in Alabama, failed. The bank's  $22 billion deposits were subsequently sold by the FDIC to BB&T Corp, which continued to serve Colonial Bank's customers.
  4. Bank of New England: In the early 1990s, the Bank of New England, a regional bank with over 300 branches and the 33rd largest bank in the United States, failed. The FDIC intervened and took over the bank's operations. The total cost of the bailout was estimated at more than $2.3 billion. The FDIC then sold the bank's assets to other banks and paid out insured deposits to depositors.
  5. 2008 Financial Crisis: During the financial crisis of 2008, several large banks failed or were on the brink of failure. The FDIC played a key role in stabilizing the banking system by providing deposit insurance and working with other federal agencies to implement measures to prevent further bank failures.

In summary, the FDIC has a long history of intervening when banks fail and providing deposit insurance to protect depositors. While not all bank failures are the same, the FDIC has a well-established process for resolving failed banks and ensuring that insured depositors are protected.

Are Credit Unions FDIC Insured?

No, credit unions are not FDIC-insured. Instead, credit unions are insured by the National Credit Union Administration (NCUA). The NCUA is an independent federal agency that was created by Congress to regulate and insure credit unions in the United States.

Like the FDIC, the NCUA provides deposit insurance to protect credit union members in case the credit union fails. The standard insurance coverage for credit unions is $250,000 per depositor, per credit union. This means that if you have multiple accounts in the same credit union, the total insurance coverage is still limited to $250,000. If you have accounts in different credit unions, each account is insured separately up to $250,000.

NCUA insurance covers deposits in savings accounts, checking accounts, money market accounts, and certificates of deposit (CDs). It does not cover other financial products, such as stocks, bonds, mutual funds, or annuities.

While the NCUA operates separately from the FDIC, the two agencies provide similar levels of deposit insurance and have similar guidelines for insurable accounts.

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FAQs

Yes, online banks are FDIC-insured as long as they are members of the FDIC. Most online banks are FDIC members, which means that deposits made at these banks are insured up to the FDIC coverage limit of $250,000 per depositor, per bank.

Yes, joint accounts can be FDIC-insured up to $500,000, which is double the standard insurance coverage of $250,000 for individual accounts. Joint accounts are a type of ownership category recognized by the FDIC, and they are insured separately from individual accounts.

If the account has more than two owners, the insurance coverage is divided equally among the owners.

No, I Bonds are not FDIC-insured. However, they are considered a very safe investment because they are backed by the U.S. government.

Yes, business accounts can be FDIC-insured, as long as the account meets the FDIC's ownership requirements. The FDIC insures deposit accounts owned by corporations, partnerships, sole proprietorships, and other business entities.

Picture of Baruch Mann (Silvermann)

Baruch Mann (Silvermann)

Baruch Silvermann is a financial expert, experienced analyst, and founder of The Smart Investor.  Silvermann has contributed to Yahoo Finance and cited as an authoritative source in financial outlets like Forbes, Business Insider, CNBC Select, CNET, Bankrate, Fox Business, The Street, and more.
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