What happens to your money if your bank closes?


bank failure

Wesabe members have been asking a lot of questions about the financial industry news in the US today, and how it might affect consumers. The situation today is a huge amount better than it was in the 1930s-era photo above, as a result of changes to the financial services industry after the bank failures of the Great Depression. Still, it’s good for consumers to be informed and to be safe with their money using some simple precautions. I tried to get some official answers, and then also talked to a customer who had all of his funds in NetBank, a bank that failed and was acquired by ING Direct last year, and have some advice based what I’ve found.

In general, US banking customers are protected by the Federal Deposit Insurance Corporation (FDIC). From the FDIC web site, here is a brief description of what protection is provided for FDIC-backed institutions:

An independent agency of the federal government, the FDIC was created in 1933 in response to the thousands of bank failures that occurred in the 1920s and early 1930s. Since the start of FDIC insurance on January 1, 1934, no depositor has lost a single cent of insured funds as a result of a failure.[…]

Savings, checking and other deposit accounts, when combined, are generally insured to $100,000 per depositor in each bank or thrift the FDIC insures. Deposits held in different categories of ownership – such as single or joint accounts – may be separately insured. Also, the FDIC generally provides separate coverage for retirement accounts, such as individual retirement accounts (IRAs) and Keoghs, insured up to $250,000. […]

The FDIC insures deposits only. It does not insure securities, mutual funds or similar types of investments that banks and thrift institutions may offer.

As long as you have less than $100,000 in a deposit account, then, and your bank is FDIC-backed (you can find out if it is here), then your funds are protected. There’s a lot more practical information and detail at the FDIC’s “When a Bank Fails” page.

(It’s a good thing the FDIC has a fairly comprehensive web site. I called them today to talk through some of the questions I’ve heard from Wesabe members, and they said today was the biggest day of call volume they ever remember having, and asked me to call back later. Today’s financial news has definitely brought a lot of people to the FDIC with questions.)

What really happens, though? I spoke with a Wesabe user who had almost all of his funds at NetBank at the time it failed last year. ING Direct acquired NetBank, so he was able to get access to his funds through that new account once it came online. His experience was instructive:

  • For two to three weeks after NetBank closed, he had “no real access” to his money. At the time, he had all of his liquid funds in NetBank accounts, so in order to get by, he relied on his parents and his fianceé, and a couple hundred dollars he happened to have in his wallet when the bank failed.
  • He got one note from the FDIC saying that NetBank was failing, and after that, all of his communication was with ING Direct. (He had less than $100,000 in his accounts, so all of his funds were protected.)
  • The first message from ING Direct said (paraphrased), “In a few days, you’ll get read-only access to your account so you can confirm the funds are present.” As he put it, “Oh, great, a web page with some numbers on it. When can I actually get that money!?”
  • He had direct deposit set up to his NetBank account, and had one direct deposit payment “vanish into nowhere.” He had to get his employer to resend that payment to his new ING Direct account. (Note that the FDIC site says this won’t happen.)
  • Several automatic payments from his NetBank account were not processed, but since he was able to get the new ING Direct account set up within a few weeks, there was no real harm from this.
  • Overall, the experience was a big shock. “If I didn’t have very, very nice parents and a very, very understanding fianceé, I’m not sure what I would have done,” he says. He now has accounts at three separate banks in order to provide better access in the time of a crisis.

(Thanks much to this former NetBank customer for providing so much information for us.)

In many senses, the NetBank failure was the best possible scenario, since a well-funded and -equipped bank immediately acquired the accounts. Of the 38 bank failures since 2000 FDIC currently shows on its Failed Bank List, 34 of them resulted in the failed bank’s accounts being acquired by another bank. While the FDIC delivers insurance checks to consumers in the event that no other bank acquires the accounts, promises to do so “as soon as possible,” and says payments “usually begin within a few days after the bank closing,” I could imagine that situation might be even more stressful and confusing, since an acquiring bank is probably better-equipped to handle new customers’ service issues. I would be especially concerned if these sorts of acquisitions became impossible because the failing banks became too large, or failures too widespread.

So, looking at the FDIC guarantees and one Wesabe member’s experience with a bank failure, what should consumers do to protect themselves? My advice:

  1. Never keep more than $100,000 in any deposit account. If you have more than that much to save in deposits, distribute it over several different banks.
  2. If you maintain an emergency financial fund (which is always a good practice), consider housing it at a separate institution from your primary account.
  3. Always keep essential deposit accounts at FDIC-backed institutions.
  4. Check your bank’s stability using Bankrate’s “Safe & Sound” ratings, or another rating system if you prefer.
  5. As part of a standard home emergency kit, keep some cash in the house in a safe place — several hundred dollars, if you can. Storing your savings in your house doesn’t make sense, but having some cash to get you through in the event of any kind of trouble — bank trouble, natural disaster, or otherwise — is smart.
  6. Be an informed consumer! Keep up with the financial news, and of course we believe Wesabe Groups are a huge help as well. Financial topics are overwhelming and can be hard to follow, but the more you learn, the better-off you’ll be.

Hope this helps. I’ll be talking about this topic tomorrow night on CNBC’s “On the Money” personal finance show, with host Carmen Wong Ulrich. If you have questions you think we should cover on the air, leave them below or drop me a line at marc@wesabe.com.

16 Responses to “What happens to your money if your bank closes?”

  1. David Kijanka Says:

    It might be informative as well to look into the S&L meltdown of the 1980s and the role of the corresponding FSLIC.

  2. Elaine Nelson Says:

    Re #3: for credit unions, the insuring agency is the NCUA: http://www.ncua.gov/ — in practice it’s identical to the FDIC, just a different set of letters. 🙂

  3. Nat Says:

    What’s the story with IRA accounts? On one hand you probably don’t need to get your hands on the money in the short term like a deposit account, but on the other hand they’re often over $100,000 once you hit a certain age, and you can’t exactly split them up and spread them around several banks without paying giant penalties.

    If something bad were to happen to an institution holding a lot of retirement accounts, like, say, Storgan Manley, what are the hypothetical outcomes if they do and don’t get acquired by someone else?

  4. Ben Says:

    Great write up – and I hope all Wesabe users take a read and understand the FDIC a little better. Two comments:

    * The way the FDIC is structured is a little weird, if you are married, you can have as many as 3 accounts (as a couple) with a single institution each insured to $100K – your personal, your joint and your spouse’s – this can be handy if you want to get the benefits the bank may offer perks for larger overall relationships – these perks can be significant in cost savings – some I’ve seen recently include waiving ATM charges, waiving brokerage charges, improved interest rates, reduced FX fees and reduced credit interest rates.

    * Storing a bit of cash at home isn’t a bad idea, but it is prone to theft and temptation (which is just theft from oneself IMHO). Keeping some cash in a safe deposit box and minimal cash at home, solves these problems with minimal hassle. Combine this with an emergency account accessible via ATM and most people should be in good shape. Safe deposit boxes aren’t all that expensive and a good place to store things like Social Security cards, passports, birth/marriage certificates, etc. Storing these things in the safe also protects against the unlikely event of potential theft.

    Keep the information flowing – no one can blame people for being cautious and concerned in the environment we have been experiencing – good information is the key to being financially secure.

  5. A La Carte (9/16) Evangelical Perspective| Today In Theology Says:

    […] A La Carte (9/16) Posted by Challies Dot Com – September 16, 2008 on 8:02 am | In Evangelical Perspective, Think Christian | The Bible as Fashion Accessory Phil Johnson writes about Zondervan’s “Bible Bunker.” “Zondervan plans to keep stoking demand by making sure God’s word looks hip, sounds relevant and is advertised all over, including in Rolling Stone magazine and Modern Bride, on MySpace–even on a jumbotron in New York City’s Times Square.” The Short, Eventful Life of Ike Boston.com has a list of incredible pictures showing the aftermath of Hurricane Ike. No Smoking Hot Spot David Evans devoted six years to carbon accounting, building models for the Australian Greenhouse Office. At the end of it all he realized “There is no evidence to support the idea that carbon emissions cause significant global warming. None.” If Your Bank Closes Wheaties for Your Wallet tells what happens when a bank closes and gives some good advice on how to protect yourself. Internet Specials from Ligonier Ligonier has a page on their site that offers some special internet discounts on books, CDs, etc. Dialog on the Sarah Palin Predicament USA Today ran a story about CBMW and Sarah Palin. Dr. David Gushee, the Distinguished University Professor of Christian Ethics at Mercer University, calls out CBMW and they respond in this blog post. Flying the Unfriendly Skies A NY Times reporter steps into the shoes of a flight attendant. She gains new respect for those who do that job! […]

  6. Should we worry about WaMu? and other disasters — pocketmint Says:

    […] Marc Hedlund posted to the Wesabe blog Wheaties for Your Wallet yesterday with an explanation for “What happens to your money if your bank closes?”.  Most of it is based on the experiences of one NetBank customer who reported a delay of two to three weeks before he had access to his money after the FDIC shut NetBank down. […]

  7. J.G Christopherson Says:

    If you are going to write articles about FDIC insurance, let’s get some facts straight. To say “Never keep more than $100,000 in any deposit account. If you have more than that much to save in deposits, distribute it over several different banks,” is a misleading statement. If a bank structures the accounts properly with proper beneficiaries the amount that you really can insure is limitless. Also with banks have the ability to change charters gives even more options and convenience of staying with a single bank. I am not bashing this article because you do make some good points, but my question is have you really studied the fine print of FDIC?

  8. Debbie P. Says:

    @Elaine Nelson,

    As Marc mentioned, he was a guest on a special edition of CNBC’s “On The Money” tonight, which looked at how to keep your money safe during these turbulent times (a key message was “don’t panic”). At the end of the show, the host asked each of the Money Experts for their final thoughts, and Marc shared the information you provided about credit union members checking http://www.ncua.gov. Here’s a link to the video clip: http://www.cnbc.com/id/15840232?video=858544606&play=1.

    Thanks so much for your tip – a big part of the reason Marc has been asked to be a regular contributor to the show is the great advice and discussions taking place at Wesabe.

  9. Alexander Gieg Says:

    I’d like to know whether there’s something similar to FDIC or NCUA for online “non-banks” such as PayPal. Say someone deposited $2000 for an auction I sold, and as unlikely as it sounds, eBay (PayPal owner) breaks before I transfered that to a bank account. My guess is I’d have lost $2000. Am I right?

  10. What happens if your bank goes under? Be prepared! — Shining City Says:

    […] In my wanderings last night, I found this excellent post regarding what you need to know if your bank collapses. It features one person’s experience after last year’s NetBank failure and buyout you’ll find helpful. […]

  11. takabanana Says:

    that’s weird – I was also a NetBank customer (for a long time) before it went “down” and ING bought them out. I had zero/no troubles with anything. All of my direct deposits continuously went though (I think ING automatically notified my employer of the new information). I always had access to my account via checks (until ING decided to not allow paper checks after about 3-4 months; main reason why I moved away from ING – I need paper checks!).
    Now I am with Zions Bank and WaMu. Zions has a better bill pay system, surprisingly, so I use that as the primary bank – but have kept WaMu for its higher Savings and CD rates.
    And yes, my total deposit accounts are less than $100k.

  12. Market My Life - An experiment in making money online » Lloyds TSB Acquires HBOS Says:

    […] What happens to your money if your bank closes? […]

  13. Lisa Says:

    Thanks for this… I’m still at a loss as to what to do as a WaMu customer, I’m in the middle of escrow on a new home and all my closing money lies in my WaMu checking. My concern is needing to access this money on a moment’s notice over the next two weeks and whether this is even going to be possible ‘if’ something happens to WaMu in the interim. Any advice?

  14. Advance Payday Blog » Blog Archive » Communication starts with your community Says:

    […] Wesabe was another player to act fast when it called the FDIC (not that they were listening) to kick off a discussion about what happens to depositers’ money in the event of a bank failure. […]

  15. My Credit Repair Says:

    I don’t have any money at WaMu, but nobody that I know would even have to worry as long as the FDIC carries through with their plan. Everything I’ve heard says that there’s no risk to the money that is in the banks, unless everybody makes a mad run to get their money out. That’s what causes the banks to crumble like a card house. (So I’ve heard)

  16. Communication starts with your community | TheOnlyDevice.com Says:

    […] Wesabe was another player to act fast when it called the FDIC (not that they were listening) to kick off a discussion about what happens to depositers’ money in the event of a bank failure. […]

Comments are closed.

%d bloggers like this: