What Happens When a Big Bank Fails?

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Sat, May 2 - 10:12 am EDT | 5 years ago by
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Earlier this week, I wrote about bank stress tests (and how useless they are for practical purposes). I got an interesting question in a comment from reader Mary Jo at Fly Away Cafe:

I only have basic accounts there (no investment accounts), and am not out looking for credit. Fortunately my only debt is a fixed rate mortgage, with about 10 years left. I’m thinking about retirement being around the corner, though, and wonder if I’m being naive about all this not affecting me.

How would Citi of BA going under affect people like me?

720px-us-fdic-logosvgThe good news is that you’re not being naive about the effects. In fact, since your money is in regular accounts, it is FDIC insured for up to $250,000 per account. That changes back to $100,000 at the end of the year — assuming the new insurance level isn’t extended. So, your money is safe — even if your bank isn’t. Of course, that doesn’t mean it will be a snap to get it if the bank fails. You will have to wait in line to claim your account, and then likely wait for a check from the government, if your bank fails and goes into receivership. For the 19 biggest banks, that isn’t very likely to happen. The government will probably do everything in their power to keep these large banks from folding.

If you have you Billpay and automatic withdrawals on your account, they should still be in effect. Additionally, direct deposit will still work. If the bank is bought by another bank (as is usually the case), you might have to make new arrangements for these services — or you may not, depending on how the merger works out. If you are concerned, you can set up back up measures at another bank. Your approved tax advantaged accounts are separately insured for up to $250,000 as well.

If you are an investor in an institution that fails, the story is different. You could potentially lose a great deal — or all — of your investment as the stock plummets to $0 a share. If you are bought out, it is usually for only a fraction of what you have invested.

image source: Wikimedia Commons

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  • Pingback: What Happens When a Big Bank Fails? : Yielding Wealth - Personal … | Money Blog : 10 Dollars : Money Articles.

  • http://weakonomics.com the weakonomist

    I work for one of those 19 banks and can say if a bank fails it is broken apart and sold off to other banks. The government has no interest in keeping it for long so they sell it at a huge discount. Imagine the government taking over a home worth $100k, they’ll sell it off for $20k just to get rid of it, and there is no shortage of other banks happy to buy the broken one.

    Like the article says, your money is safe. The government would bankrupt itself to insure your deposits.

  • Julie Freitag

    Does the federal insurance coverage of $250,000.00 end at the end of the year, (unless extended), or is it December 10th?

  • Miranda Marquit

    It ends December 31, 2009.