What is a bank failure?
A bank failure is the closure of a bank by a government regulator generally when the bank loses the ability to pay back debts or return deposits to customers. A failed, or bankrupt, bank will have its assets, such as customer loans and investments for future profit, be worth less than its liabilities, such as customer deposits that the bank owes. When many customers lose confidence in a bank and try to pull out all their money at once, a bank run occurs.
The Federal Deposit Insurance Corp., the federal agency that manages failed bank operations, has not lost any insured deposits since coverage began in 1934. And no deposit customers of failed banks have lost any of their deposits, insured or uninsured, in recent years.
Silicon Valley Bank’s collapse in 2023 sent shock waves through the banking industry, but bank failures aren’t common. Since 2001, there have been fewer than 600 bank failures, and nearly 70% of them happened in the three years immediately following the 2008 financial crisis. For reference, there are more than 4,500 FDIC-insured banks.
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What happens when a bank fails?
A failed bank doesn’t go through the same bankruptcy process that other failed businesses go through. Instead, the FDIC steps in with two responsibilities: to protect customer deposits and to take over the failed bank to sell off assets, settle debts and sell the bank to a healthy bank.
1. FDIC protects deposits
Most banks are insured by the FDIC. If a bank fails, the FDIC protects up to $250,000 per deposit account customer, per bank and per ownership category. The category refers to how single-owned and joint accounts and trusts count separately. FDIC insurance protects money in deposit accounts, such as checking, savings and money market deposit accounts and certificates of deposit. Stocks, bonds and other investments are not protected.
The FDIC guarantees that customers receive their deposits up to the insurance limit, either by check or in a new account at a healthy bank. If there’s no bank to buy the failed bank’s deposits, the FDIC aims to pay customers by check within two business days of the bank’s closure. In recent years, the FDIC has provided customers of failed banks with equivalent accounts at new banks with no loss of deposits.
In Silicon Valley Bank’s case in March 2023, three federal regulators — the FDIC, the Department of the Treasury and the Federal Reserve — agreed to protect all depositors’ money, even uninsured amounts. The regulators cited a systemic risk exception in this situation to prevent a financial crisis as customers with uninsured deposits at other banks started to panic.
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If you’re in the fortunate position to worry about having uninsured deposits, there are ways to insure all your money over $250,000. 2. FDIC sells the failed bank
The FDIC becomes the receiver of a failed bank to collect and sell assets, settle debts and quickly sell to another bank. The most common and preferred type of sale is for a healthy bank to take on all insured deposits so customers of the failed bank have continuous access to their funds and banking services. The healthy bank can also buy all loans and other assets of the failed bank.
In liquidating the failed bank, the FDIC pays affected customers and others in this order: insured deposit customers, uninsured deposit customers, creditors (or those who are owed money), and stockholders. Creditors and stockholders usually receive little to no money.
Bank customers and the general public aren’t notified until after a bank closure. Bank failures tend to occur on a Friday, usually giving the FDIC enough time to sell the bank before the following Monday. Two recent exceptions to quick sales were Silicon Valley and Signature Bank, in which the FDIC created temporary bridge banks for customers until it found buyers for the failed banks
What happens when a credit union fails?
Credit unions, the not-for-profit equivalent to banks, have a different federal deposit insurance agency, the National Credit Union Administration. NCUA insurance protects credit union members’ deposit accounts up to $250,000, the same way that the FDIC does.
When a credit union is in trouble, the NCUA places it into a conservatorship, taking control of the credit union. A conservatorship can have three endings: A credit union resolves operational issues, decides to merge with another credit union or goes through liquidation. The NCUA manages liquidations, meaning involuntary closures that can result in another credit union buying the failed institution.
As with banks, credit union failures aren’t common. Since 2009, there have been fewer than 300 instances of a credit union experiencing a conservatorship, merger or liquidation, according to the NCUA. For reference, there are 4,500 credit unions.
What happens when a neobank fails?
Not every consumer banking institution is a bank or credit union. Neobanks are financial technology firms that partner with banks to offer federally insured accounts, but neobanks aren’t banks themselves.
When a neobank fails, deposits are still held at its partner bank, and the neobank must work with its customers directly to help them recover their funds. Neobank customers can experience delays or other issues in getting money back. The FDIC doesn’t step in unless the neobank’s partner bank fails. See more about what happens if a neobank fails.
Frequently Asked Questions
Does the FDIC use taxpayer money during a bank failure?
No. The FDIC pays customers at failed banks their insured deposits from money collected from insured banks over time in a deposit insurance fund. The FDIC also adds interest earned from U.S. Treasurys into the fund.
