What Happens to Your Money When a Bank Closes

Banks are failing on a frighteningly regular basis. A worry all of us have is what happens to our money if the Bank fails and our accounts are close.

Luckily we, as a country, learned out lessons for the big financial crash of 1929. In 1933 the Federal Deposit Insurance Corporation (FIDC) was set up to insure depositors against financial loss if the Bank their money is in closes. If your Bank is covered by the FIDC your money is safe should the Bank close.

The FIDC is an independent agency of the federal government and works just like any insurance company. It is funded by the premiums that member Banks pay for the insurance cover. These funds are used to reimburse depositors for money they may lose if their bank closes.

The FIDC covers over 5000 Banks and savings Banks in the country - nearly half the total number of Banking institutions. A Bank covered by the FIDC is called an "insured Bank" and will display the FIDC sign at each teller window. While it does not insure securities or investment instruments a Bank may offer, with funds of $49 Billion it has adequate resources to cover depositor losses in cases of Bank closures. At present the total value of deposits insured are about $3 Trillion.

Each depositor in covered to a limit of $100,000 which includes all savings, checking and other deposits in a Bank. When a Bank fails, the government, either state or federal, will order its formal closing and the FIDC steps in to take charge. What usually happens is that the deposits and loans of the failed Bank are sold to another financial institution. Once the deposits are bought by another Bank, depositors who had accounts with the closed Bank automatically become depositors with this Bank.

The FIDC makes good any shortfall in your account balance caused by the original Banks' closing. For example, if you had $50,000 in your savings account but the value of the account when the new Bank bought it was only $20,000, the FIDC will fund the balance $30,000 so you have lost nothing.
To make sure that you are protected against a bank closing, make sure that your Bank is an FIDC insured financial institution.