Posted on Monday, April 4, 2011
I. With so many banks failing this year (115 as of last Friday) and with predictions that the rate will not likely slow for at least the next few years, people are starting to wonder if maybe their bank will be next. While it is hard to determine if a bank will close or not, there are a few things that you can learn from looking at the institutions that have failed so far that can give you some heads up as to if your bank is showing any danger signs. We provide you with some of that information here, as well as some basic information on why your bank fails, and what to do when it does.
Why It Failed
When a bank fails, it is usually because it has become undercapitalized. There are many ways that undercapitalization is measured, and the exact measurement can vary by state, but if a bank looks as though it does not have enough money to cover the transactions that it processes, than regulators will generally issue a warning and conduct a further investigation. If a bank is found to consistently not have enough reserve funds to cover losses, such as those that were suffered in the mortgage loans this year, the regulators will shut the bank down.
What to Do: Look out for statements from your bank about warnings and pay close attention to the bank assets and other financials issued by the bank in its monthly shareholder letters.
What Happens Now
When a bank fails, it is usually announced by the FDIC on Friday afternoon, so that the bank has the weekend to do whatever it needs to do to smoothly transfer its accounts to the “assuming institution,” the bank that the FDIC has chosen to buy up the failed banks assets and deposits. If this is the case, then the depositor will not notice any changes (except for policy changes imposed by the new bank) and their branches will generally open up as normal under the new name the following week.
If the FDIC is not able to find a buyer, then it will have to dip into its Deposit Insurance Fund (DIF) in order to pay back the deposits of the failed banks customers. Although this has not been the case with most of the banks failed this year, if this does happen the FDIC will make payouts “as soon as possible” after the failure announcement.
What to Do: When you bank fails, see if the FDIC was able to sell the assets to another bank. If you don’t mind being a customer of the new bank, do nothing; your deposits will be transferred automatically. If the FDIC does not find a buyer, then it will contact you by mail about the failure, and the steps it is taking to insure your account. The FDIC will never send unsolicited emails to consumers, so be careful if you see an email from the FDIC, as it may be a phishing scam.
The End of Your Bank Is Not The End of The World
It is important to realize that even if your bank does fail, this isn’t the end of the world. While it could cause some minor annoyances as the banks shuffle their employees and switch over to a new system, deposits at FDIC insured institutions still protect all of your deposits, and usually the bank simply opens up under a different name the next day. However, if you want to be able to choose your new bank for yourself rather than just become a customer of whatever new bank the FDIC decides to enter into a deal with for the failed banks assets, than having advance knowledge can give you the time to shop around and make the switch before you bank fails and the decision is made for you.