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What happens when a bank fails?

July 3, 2020 |  Categories:  Bank Failures  

The following is taken directly from FDIC website:


Though unlikely, bank failures do occur and the FDIC responds in two capacities. First, as the insurer of the bank's deposits, the FDIC pays insurance to depositors up to the insurance limit. Historically, the FDIC pays insurance within a few days after a bank closing, usually the next business day, by either (1) providing each depositor with a new account at another insured bank in an amount equal to the insured balance of their account at the failed bank, or (2) by issuing a check to each depositor for the insured balance of their account at the failed bank.


Some deposits that exceed $250,000 and are linked to trust documents or deposits established by a third party broker may have a short wait so that their accounts can be reviewed to determine the amount of deposit insurance coverage available to them. The amount of time involved depends on how long it takes for the depositor to provide supplemental information to the FDIC so that we can complete the insurance determination.


Second, as the receiver of the failed bank, the FDIC assumes the task of selling/collecting the assets of the failed bank and settling its debts, including claims for deposits in excess of the insured limit. If a depositor has uninsured funds they receive the insured portion of their funds quickly, as described above. They may also, however, recover some portion of their uninsured funds (their remaining claim on the failed bank) from the proceeds from the sale of failed bank assets. It can take several years to sell off the assets of a failed bank. As assets are sold, however, depositors who had uninsured funds usually receive periodic payments (on a pro-rata "cents on the dollar" basis) on their remaining claim.



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