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If your bank fails, breathe easy; your deposits are covered
12:28 PM CST on Saturday, November 13, 2010
By PAMELA YIP / The Dallas Morning News
pyip@dallasnews.com News of a financial institution's collapse can send chills down the spines of depositors who fear that their money is gone forever.
If that should happen to you, don't panic.
"A bank failure is a seamless process to insured depositors," said Greg Hernandez, spokesman for the Federal Deposit Insurance Corp., which insures deposits in banks and savings and loans for up to $250,000.
"As long as they're under the $250,000 insured limit, their money is safe. No one has lost a penny of insured deposits, and no one ever will."
This year, 143 banks have collapsed – more than all of last year – and analysts expect more will go under. From 160 to 200 banks are estimated to close this year, and a similar number is expected next year.
If your financial institution adds to these statistics, here's what you need to know:
When a bank fails, the FDIC notifies each depositor in writing using the depositor's address on record with the bank. For that reason, it's important that you make sure your financial institution has your current address.
In most cases, another institution will take over the failed one.
"The one thing they [consumers] will notice the next time they either come in physically to their bank or go online, they will notice that their bank has a new name," Hernandez said.
Despite the name change, consumers should be able to continue using their checks, online banking, debit and ATM cards.
When a failed bank is acquired by another bank, the assuming bank also notifies the depositors of the change, usually in the next bank statement.
Credit unions have a similar process, though "credit union failures are rare," said Dick Ensweiler, president and chief executive of the Texas Credit Union League.
"When a federally insured credit union fails, it is either liquidated or purchased and assumed by another financial institution," said John McKechnie, director of public and congressional affairs at the National Credit Union Administration.
"The second option is one that NCUA attempts to pursue, since it means the members will continue to receive financial services in an uninterrupted fashion."
However, if a federally insured credit union is liquidated, the NCUA "immediately begins the process of verifying account balances, disbursing insured funds to members, contacting creditors, and managing remaining assets," McKechnie said.
Is my money safe?
Let's be clear: The FDIC insures up to $250,000 per depositor, per insured bank, for each ownership category, such as accounts owned by one person, joint accounts and IRAs.
This includes principal and accrued interest.
But there are ways to structure accounts so that deposits exceeding $250,000 are insured.
For example, joint accounts are insured up to $250,000 per account holder. So, a joint account held by a husband and wife is insured for a total of $500,000.
Similarly, accounts at credit unions are insured up to $250,000 per account holder by the National Credit Union Share Insurance Fund, which is administered by the National Credit Union Administration.
Exceeding the limit
There are two possible outcomes for consumers whose accounts exceed the $250,000 insurance limit.
In the majority of cases, "the acquiring institution takes all deposits, including those that are over the insured limit" and operations go on as usual, said Hernandez of the FDIC.
But, if the agency can't find another financial institution to take over the failed banks' operations, depositors will quickly get a check for their insured funds. Customers with accounts exceeding the insurance limit then will be paid some or all of their uninsured deposits, depending on how much the FDIC is able to recover by selling the bank's assets.
"If you're over the $250,000 insured limit, then you are owed this much, and when the bank liquidates all remaining assets, you will be next in line before shareholders and creditors to get your money back," Hernandez said.
Payouts are rare because, in most cases, the FDIC can find another bank to take over a failed institution, he said.
What about loans?
This is where it can get tricky, said Bert Ely, a financial industry consultant in Alexandria, Va.
"If you have a borrowing relationship with the bank, that's where we're hearing the complaints," he said. "The problem is that the credit gets cut off."
Ely said this primarily affects open lines of credit that can be tapped repeatedly, such as home equity lines of credit, working capital loans for businesses and construction loans.
"If they have some open lines of credit, this has been a problem in some failures, particularly where the [failed] bank did a lot of lousy lending," Ely said.
What's more, loan applications pending with the failed bank may get gummed up.
"Everything gets frozen," Ely said.
According to Hernandez, there is no requirement for an acquiring bank to take over loans or loan applications of the failing bank.
In general, however, an acquiring institution will take over credit card accounts, Hernandez said.
"Credit cards are considered loans and the terms can't be changed by the acquiring bank," he said.
The bottom line for customers of federally insured financial institutions is they can breathe easy – there are safety nets in place if the bank fails.
However, you will need to stay on top of the process and read all communications from banking regulators and the institution taking over the failed bank. It's your money, after all.
If your bank fails, breathe easy; your deposits are covered
12:28 PM CST on Saturday, November 13, 2010
By PAMELA YIP / The Dallas Morning News
pyip@dallasnews.com News of a financial institution's collapse can send chills down the spines of depositors who fear that their money is gone forever.
If that should happen to you, don't panic.
"A bank failure is a seamless process to insured depositors," said Greg Hernandez, spokesman for the Federal Deposit Insurance Corp., which insures deposits in banks and savings and loans for up to $250,000.
"As long as they're under the $250,000 insured limit, their money is safe. No one has lost a penny of insured deposits, and no one ever will."
This year, 143 banks have collapsed – more than all of last year – and analysts expect more will go under. From 160 to 200 banks are estimated to close this year, and a similar number is expected next year.
If your financial institution adds to these statistics, here's what you need to know:
When a bank fails, the FDIC notifies each depositor in writing using the depositor's address on record with the bank. For that reason, it's important that you make sure your financial institution has your current address.
In most cases, another institution will take over the failed one.
"The one thing they [consumers] will notice the next time they either come in physically to their bank or go online, they will notice that their bank has a new name," Hernandez said.
Despite the name change, consumers should be able to continue using their checks, online banking, debit and ATM cards.
When a failed bank is acquired by another bank, the assuming bank also notifies the depositors of the change, usually in the next bank statement.
Credit unions have a similar process, though "credit union failures are rare," said Dick Ensweiler, president and chief executive of the Texas Credit Union League.
"When a federally insured credit union fails, it is either liquidated or purchased and assumed by another financial institution," said John McKechnie, director of public and congressional affairs at the National Credit Union Administration.
"The second option is one that NCUA attempts to pursue, since it means the members will continue to receive financial services in an uninterrupted fashion."
However, if a federally insured credit union is liquidated, the NCUA "immediately begins the process of verifying account balances, disbursing insured funds to members, contacting creditors, and managing remaining assets," McKechnie said.
Is my money safe?
Let's be clear: The FDIC insures up to $250,000 per depositor, per insured bank, for each ownership category, such as accounts owned by one person, joint accounts and IRAs.
This includes principal and accrued interest.
But there are ways to structure accounts so that deposits exceeding $250,000 are insured.
For example, joint accounts are insured up to $250,000 per account holder. So, a joint account held by a husband and wife is insured for a total of $500,000.
Similarly, accounts at credit unions are insured up to $250,000 per account holder by the National Credit Union Share Insurance Fund, which is administered by the National Credit Union Administration.
Exceeding the limit
There are two possible outcomes for consumers whose accounts exceed the $250,000 insurance limit.
In the majority of cases, "the acquiring institution takes all deposits, including those that are over the insured limit" and operations go on as usual, said Hernandez of the FDIC.
But, if the agency can't find another financial institution to take over the failed banks' operations, depositors will quickly get a check for their insured funds. Customers with accounts exceeding the insurance limit then will be paid some or all of their uninsured deposits, depending on how much the FDIC is able to recover by selling the bank's assets.
"If you're over the $250,000 insured limit, then you are owed this much, and when the bank liquidates all remaining assets, you will be next in line before shareholders and creditors to get your money back," Hernandez said.
Payouts are rare because, in most cases, the FDIC can find another bank to take over a failed institution, he said.
What about loans?
This is where it can get tricky, said Bert Ely, a financial industry consultant in Alexandria, Va.
"If you have a borrowing relationship with the bank, that's where we're hearing the complaints," he said. "The problem is that the credit gets cut off."
Ely said this primarily affects open lines of credit that can be tapped repeatedly, such as home equity lines of credit, working capital loans for businesses and construction loans.
"If they have some open lines of credit, this has been a problem in some failures, particularly where the [failed] bank did a lot of lousy lending," Ely said.
What's more, loan applications pending with the failed bank may get gummed up.
"Everything gets frozen," Ely said.
According to Hernandez, there is no requirement for an acquiring bank to take over loans or loan applications of the failing bank.
In general, however, an acquiring institution will take over credit card accounts, Hernandez said.
"Credit cards are considered loans and the terms can't be changed by the acquiring bank," he said.
The bottom line for customers of federally insured financial institutions is they can breathe easy – there are safety nets in place if the bank fails.
However, you will need to stay on top of the process and read all communications from banking regulators and the institution taking over the failed bank. It's your money, after all.
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