When a recession is a threat, individuals with savings fear the potential for banks to begin to fail. People start to look for alternatives to keeping their money in a financial institution. In the investment world, when a recession is looming, and failures are a threat, gold and other precious metals are the demand.
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When a bank closes, and you need a place to put your funds, investments seem like the wisest option. Why do banks fail?
This happens when a bank is depleted of funds and is unable to cover their clients’ deposits and or any money due out. Three regional banks over the last few months have failed.
When their failures occurred, the news resulted in people demanding money from those banks and several other regional banks.
With two of the fails in March 2023, the Federal Deposit Insurance Corporation covered both insured and uninsured deposits. With the May 2023 fail, the bank was primarily purchased by another institution that converted the deposits into active accounts with them.
Regardless of the factors creating the failure, a federally insured bank’s clients are given back their money to the insurance provisions. Let’s look at what contributes to a bank failure and the results when these occur.
The Federal Deposit Insurance Corporation is an independent government agency that regulates the US banking industry. Banks belonging to the FDIC that provide deposit accounts are covered by FDIC insurance at a roughly $250,000 cap meaning essentially that each individual is insured to that limit for their funds.
When a state or federal regulatory agency (FDIC) closes a bank, these are then deemed failed. At that point, the agency, usually the FDIC, assumes the bank’s assets and debts, which will then be fulfilled.
The agency has no desire to maintain the bank. The objective is to try to sell the institution or ultimately dissolve it.
If a sale occurs, an announcement will be made referring to the new owner, and the transitioning process will begin. Dissolving the bank puts the FDIC in charge of liquidation, settling deposit claims that exceed insurance provisions, and resolving debts.
A big part of what happens to client funds when a bank closes is whether the money was insured. Many institutions have FDIC coverage making it a pretty safe bet that people’s money is secure. But that doesn’t make the situation any less stressful for those linked to the bank going through the failure.
A primary concern is if your funds exceed the FDIC insurance provisions. The additional amount above that $250,000 cap is uninsured. Let’s look at what happens in each circumstance.
The FDIC provides insurance coverage for funds up to $250,000. If you have money in an FDIC-insured bank that’s going through closure and your funds are less than that cap, you should anticipate the entire amount repaid with regulatory monies.
- Uninsured funds
If you have funds that exceed the FDIC cap, over $250,000, retrieving these becomes somewhat tricky. If a healthier bank assumes ownership and makes the old institution’s accounts active in the new system, everything will likely remain intact.
If that doesn’t occur, often, claims are filed to try to recover the uninsured funds. Usually, the only way these will be repaid is if there’s enough money remaining after selling assets.
If you experience a bank failure with an FDIC-insured institution, the silver lining is that you will be guaranteed up to at least $250,000, which the FDIC aims to provide within two business days of the closure. If you have more, not all hope is lost.
You can and should file a claim with the potential for receiving the remainder depending on liquidation.
In the case of credit unions, the regulatory agency is the National Credit Union Association or NCUA, which performs a comparable service to the FDIC with similar limits.
With some financial institutions, there are specific accounts that aren’t covered by either agency; these are brokerage accounts. The Securities Investor Protection Corporation (SIPC) carries an insurance cap of $500,000 for the funds and securities within the brokerage account.
It’s essential to educate on the fundamentals of your institution to learn if it is insured by a government agency and what sort of account you carry so you can anticipate a figure if there were an occurrence.
The Great Depression is the reason for the creation of the FDIC in the 1930s due to the bank failures at that time. Financial institutions are responsible for paying premiums to maintain the coverage. There is no expectation put upon taxpayers for these fees.
Bank failures occur quite simply because the entity can’t meet its obligations either to the clients or their outstanding dues. Varied triggers can create the inability to remain solvent.
The institution may take on significant risks, and the losses become apparent with no extra capital to recover, causing the regulator to assume the bank for selling or dissolving. Go here for details on what happens if a bank fails and learn if the crisis is over.
Fortunately, taxpayers are not held accountable for the insurance premiums, so when the financial institution assumes the risk to the point of failing, the taxpayers are not the ones who experience the loss.
When you receive the insurance money from the regulating agency, you’re not being paid back with your own money.
The bank is entirely responsible for funding its own insurance policy in case they mismanage its funds and cannot cover its obligations at some point. Their final act will be repaying the clients who kept them in business.
Many financial institutions are federally insured by a regulatory agency up to a specific dollar cap. A priority is confirming this fact with your banking institution and learning what that cap is for your particular account.
The takeaway is that if you have an insured account, you will at least receive a recovery of up to that amount if the bank is to fail. If you happen to have more funds in the account than the insured amount allows, you can file a claim in an attempt to attach what’s received after liquidation.
Ideally, a healthier institution will assume ownership if things go seamlessly, and the old accounts will reactivate under the new ownership. You might never realize there was a problem.