From the fall of 2020 to the beginning of 2023, not a single bank had to shutter its doors -- a signal of a relatively healthy banking sector. Then, in March 2023, Silicon Valley Bank (SVB) collapsed, making it the second-biggest bank to ever fail in the US. Less than two months later, First Republic claimed that badge of dishonor. Suddenly, people wondered whether the financial industry was at a precipice.
However, you probably don’t need to stay up at night stressing over whether the money in your checking and savings account is safe, thanks to insurance coverage designed to help consumers get most of their money back if their bank disappears.
Recent bank failures
Five banks failed in 2023: Silicon Valley Bank, Signature Bank, First Republic Bank, Heartland Tri-State Bank and Citizens Bank (not this Citizens). So far, we have not seen any bank failures in 2024.
While bank failures are concerning for customers who’ve deposited money at that particular institution, the impact on the broader economy is typically limited. In the case of Citizens Bank in Sac City, Iowa, the institution had only $66 million in assets and $59 million in deposits when it failed -- a relative drop in the industry’s bucket. But bigger players like First Republic, which had around $229 billion in assets and just below $104 billion in deposits when it failed, can have serious implications for the entire banking system, such as declining consumer confidence in the industry and bank runs.
Why do banks close?
Banks fail for a wide range of reasons, and when they do, the Federal Deposit Insurance Corporation (FDIC) typically issues a report explaining what paved the way to the worst-case scenario.
In the case of Silicon Valley Bank, a key driver was a classic bank run -- when a large number of depositors get wind of trouble and rush to withdraw their money. Banks don’t have the cash on hand to meet these demands, which leads to more worries and a faster stampede to take out money -- a cycle that eventually dooms the institution. However, the FDIC pointed out that the bank also failed “to mitigate interest rate risk.” When the Federal Reserve started hiking rates to fight inflation, the bank’s business model wasn’t ready for the shift.
In other cases, bank failures come down to something much simpler: bad leadership. The FDIC’s analysis of Signature Bank’s ultimate doom was “poor management.” It’s proof that bank failures can ultimately be the same as any other business failure: If the decision-makers at the top make bad decisions, it’s not going to end well.
What happens to your money if your bank closes
If you’re worried about your bank’s health, you should make sure the institution is part of the FDIC -- or, in the case of credit unions, the National Credit Union Administration (NCUA). If it isn’t, it’s time to find a new place to move your money.
If your bank does fail, here’s what will happen next.
If your bank is federally insured
Most banks and credit unions are insured by the FDIC or NCUA, which protects your deposits for up to $250,000 per person, per account type, including checking, certificate of deposit, money market and savings accounts. In some cases, funds on prepaid cards also qualify for FDIC insurance if certain conditions are met.
If your bank closes, the FDIC will either try to move your money to another bank in good standing or mail you a check for up to the insured amount. If it doesn’t move your money, the bank should mail you a check within two business days of closing.
If your money is in a trust or issued through a broker or employer plan, the FDIC will need supporting documentation, and it may take longer to receive your funds. If you have more than $250,000 in your account, it’s still possible that you can receive the full amount, but you’ll need to file a claim with the FDIC. Then, as the bank’s assets are liquidated, you may receive payments.
Note that the FDIC doesn’t protect the following, even at insured banks:
- Stocks
- Bonds
- Mutual funds
- Annuities
- Life insurance policies
- Safe deposit boxes
- US Treasury bills, bonds or notes
- Municipal securities
- Cryptocurrency
Similar to the FDIC, the NCUA insures credit union deposit accounts. If your credit union is NCUA-insured and closes, you’ll receive a notice by mail. It’s important to note that the NCUA’s process differs from the FDIC’s. Credit unions don’t fail without warning. The NCUA first places them in conservatorship and attempts to help them resolve their operational issues. If they can’t, the NCUA helps them merge with another credit union or liquidates their assets.
The NCUA will send you a letter notifying you if your credit union closes and will return your funds within five days of closing. If your balance exceeds $250,000, you’ll need to complete a Member Confirmation and Affidavit form to receive any funds over the insured limit.
The NCUA doesn’t cover losses from the following:
- Stocks
- Bonds
- Mutual funds
- Annuities
- Life insurance policies
- Municipal securities
If your bank isn’t insured
If your financial institution isn’t covered by FDIC or NCUA insurance, things can get more challenging. There isn’t a playbook to follow since the FDIC and NCUA have no reason to get involved.
There is a notable exception related to uninsured deposits, though. The FDIC wound up covering both insured and uninsured deposits when Silicon Valley Bank collapsed via a systemic risk exception -- a sign of just how important that institution was to the broader industry.
What to do if your bank closes
Watch for official notifications
If your bank closes, you should receive notification of what will happen to your money from the FDIC or NCUA, the acquiring bank or both. You’ll automatically have an account at the new bank, or the FDIC or NCUA will issue you a payment returning your funds.
Assess the options at the new bank
Assuming your account is transferred to a new bank, look at the terms and conditions of your new account. Will you need to have a larger minimum balance to avoid fees? Are there branches nearby? Does the institution offer a sophisticated digital experience? These factors can help you decide if you should keep your account at the new bank or find a different bank.
Compare other places to move your money
As you evaluate the acquiring bank, also take time to reflect on what you need from a bank. There are plenty of great banks and credit unions offering top-notch customer service and low fees. Use this as a time to find the best home for your money.
Update your account information with your employer and online bill pay
If you stick with the acquiring bank, your direct deposits should automatically begin landing in your new account. However, it’s important to verify that anyone who regularly sends you money -- such as your employer or the Social Security Administration if you’re retired -- has your correct routing and account numbers.
You’ll also want to update your info with companies where you’ve set up autopay for your bills.
How to keep your money safe from a bank failure
The best way to avoid the potential fallout of a bank failure is to verify that your deposits are covered by FDIC or NCUA insurance. Then you should ensure you’re within the $250,000 limit. For example, if you have $325,000 in a savings account, $75,000 of that may not be covered.
However, there are easy ways to qualify for more coverage. If your savings account is a joint account with your spouse, the $250,000 limit doubles to $500,000. Another option is to open multiple account types at multiple institutions.
If you’re a high-net-worth client looking to spread out a large sum of money and ensure it all falls under FDIC coverage, many banks will do the diversifying for you and spread out millions of dollars among a network of insured institutions.
The bottom line
We’re a long way away from the tidal wave of bank failures that shook the industry during the Great Recession when nearly 300 banks failed in 2009 and 2010. But even then, depositors didn’t need to worry about much. The FDIC stepped in to shore up the industry and preserve confidence that anyone who deposits money could get it back within the organization’s coverage limits.
While there is plenty of economic uncertainty about where interest rates will go next, what will happen with inflation and what it all means for banks, it won’t change the fact that your money is safe if it’s with a federally insured institution.
FAQs
No. As long as your bank offers FDIC insurance -- or your credit union offers NCUA insurance -- you shouldn’t spend any time stressing about a potential failure. Additionally, bank failures are very rare, so your bank failing is an unlikely scenario.
You won’t receive any notice that your bank is about to fail -- it’s part of the FDIC’s aim to prevent a run on the bank. However, if the bank’s stock is losing significant value or a quarterly earnings report reveals a sizable amount of unexpected losses, it may be in trouble. That doesn’t mean a failure is imminent, though.
In most cases, when a bank fails, another bank acquires the failing institution, and your direct deposits are automatically routed to an account at the new bank. However, if you’re uncertain about where your next direct deposit will wind up, contact the office location of the failed bank. If you don’t get a response, contact the FDIC directly.
If your bank fails, any loans you have with it -- such as auto loans or personal loans -- will be sold to a new lender, and you’ll make payments to that lender. Watch out for a notification from the FDIC and whatever lender purchases your loan within a few days of the news of your bank’s failure.
