There have been several financial institutions shut down by the FDIC.
In the past few weeks, we've seen the highest-profile bank failures in the United States since the financial crisis in 2008. And while things hopefully stabilize soon in the banking industry, there are some important questions on the minds of U.S. bank customers, including what will happen to their outstanding loans if their bank fails. Here's what you can expect if your financial institution gets shut down by regulators.
What happens to your loans if your bank fails?
The short answer is that if your bank fails and you have outstanding loans, you still owe the money.
For more context, when a bank "fails," it means that the FDIC has determined it cannot continue to operate independently for whatever reason (usually it is insolvent, or quickly heading in that direction). In these situations, the agency's top priority is to find a healthy bank to acquire the assets and deposits of the failed bank. After all, the FDIC is the agency that insures deposits, and it doesn't want to pay out money if it can simply find another bank to take over the old bank's operations.
If this happens, the failed bank's entire loan book is transferred to the acquiring bank, and the loan customers will simply owe the exact same amount of money and on the same terms to the new bank. For example, during the 2008 financial crisis, Washington Mutual was placed into receivership by the FDIC in the largest bank failure in U.S. history. The bank's assets and deposits were sold to JPMorgan Chase, and all Washington Mutual branches were rebranded as Chase branches by the end of 2009. If you had a Washington-Mutual-owned loan prior to the failure, you had a Chase loan after the bank was acquired.
If the failed bank isn't acquired right away
There are some other possible scenarios that can happen. Sometimes the FDIC can't find a buyer for a failed bank in its entirety but can sell off the failed bank's assets in pieces to different institutions. For example, in the financial crisis era, buyers may have been interested in acquiring a failed institution's auto loans, credit card receivables, and top-tier mortgages, but might not have any interest in their subprime mortgages.
Another scenario is that it's entirely possible that the FDIC will place the bank in receivership in a newly created institution (controlled by the FDIC) and it will remain there for some time. For example, when Silicon Valley Bank failed on March 13, 2023, the FDIC created and operated Silicon Valley Bridge Bank and transferred all customer deposits (such as savings and checking accounts) into it, with the goal of protecting depositors' access to their money while the FDIC attempts to sell Silicon Valley Bank to a healthy institution.
Whatever the actual process is, the important takeaway is that you still owe the money. Don't use a bank failure as a reason to stop making loan payments. In all cases, you should receive communication from the new bank with instructions on how to continue to make your loan payments and where the money should be sent.
The FDIC will also post information for loan customers. For example, on the FDIC's information page about Silicon Valley Bank, there is a section of information that states: "If you had a loan, you should continue to make payments, including escrow payments, as usual; the terms of your loan will not change."
The bottom line
To sum it up, there are two important pieces of information you need to know if a bank fails while you have an outstanding loan with it:
First, you still owe the money. Your debt doesn't magically go away just because your bank does.
Second, the new owner of the loan -- either the FDIC or the acquiring bank -- must honor the original terms of the loan. In other words, it can't decide to make you pay the entire balance immediately, change your interest rate, or make any other changes to the terms.
If your bank fails, don't panic. You will receive information within a few days from the FDIC or whichever bank ends up acquiring your loan, and it will tell you where your loan payments should be directed going forward.
FAQs
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.
What happens to my loan if my bank fails? ›
If a lender collapses, your loan may be transferred to another institution, but you are still responsible for making payments. To protect yourself, make sure your contact information is up to date, keep copies of your statements, and continue making payments as usual.
What happens to credit unions if banks collapse? ›
No. Credit unions are insured by the National Credit Union Administration (NCUA). Just like the FDIC insures up to $250,000 for individuals' accounts of a bank, the NCUA insures up to $250,000 for individuals' accounts of a credit union.
What happens if a bank shuts down and you have a loan? ›
Your loan will be sold to another creditor or held by the FDIC and you will be notified within a few days where to send your payments. Your rights and obligation to pay the loan do not change.
Where to put money if banks fail? ›
The first line of defense, federal deposit insurance from the FDIC, has worked reliably to date. To avoid a financial hit if your bank fails, stick to insured institutions and account types, stay under account balance limits and use different ownership arrangements.
How to get money from FDIC if bank fails? ›
After a seizure, the bank's employees work for the FDIC. The customer experience does not change much. Depositors are still able to retrieve their money, usually up to the insured amount, including by writing checks, accessing their safe deposit boxes, and withdrawing money through an ATM.
How much money is guaranteed if a bank fails? ›
When is DICGC liable to pay? If a bank goes into liquidation, DICGC is liable to pay to the liquidator the claim amount of each depositor upto Rupees five lakhs within two months from the date of receipt of claim list from the liquidator.
Which banks are in danger of failing? ›
The banks of greatest concern are Flagstar Bank and Zion Bancorporation, according to the screener. Flagstar Bank reported $113 billion in assets with a total CRE of $51 billion. The bank, however, only had $9.3 billion in total equity, making its total CRE exposure 553% of its total equity.
Is your money safer in a credit union or a bank? ›
One question that often arises is, "Are Credit Unions Safer than Banks?" If you're looking for a short answer, you'll be happy to know that we're not making you read the whole post: Credit Unions and banks are roughly identical in safety because deposits at both are insured by the Federal government to $250,000.
Are credit unions safe during this banking crisis? ›
Greater stability and lower risk
Credit unions and banks are both insured, with most banks being insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000 per customer. Most credit unions are similarly insured by the National Credit Union Administration (NCUA) for up to $250,000.
Bottom line. For the most part, if you keep your money at an institution that's FDIC-insured, your money is safe — at least up to $250,000 in accounts at the failing institution. You're guaranteed that $250,000, and if the bank is acquired, even amounts over the limit may be smoothly transferred to the new bank.
What happens to my CD if the bank fails? ›
The FDIC Covers CDs in the Event of Bank Failure
CDs are treated by the FDIC like other bank accounts and will be insured up to $250,000 if the bank is a member of the agency. If you have multiple CDs across different member banks, each will be protected up to that limit.
What happens if you never pay a bank loan? ›
After you fail to make a few payments, your loan will be considered in default, which essentially means that you've failed to follow through on the terms of your loan agreement. Once you're in default, you can be contacted by debt collectors and even be asked to appear in court.
What happens to your debt if the bank collapses? ›
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.
Is your money safe if the banks crash? ›
When a financial institution is federally insured, money deposited into a bank account will be secure even if the financial institution shuts down. Your money will not be lost. It is usually transferred to another bank with FDIC insurance, or you'll receive a check.
What happens to credit unions when banks collapse? ›
Credit unions are insured by the National Credit Union Administration (NCUA), and it offers coverage up to $250,000 per share owner, per insured credit union, for each account ownership category. You can visit the NCUA's Credit Union Locator to find an NCUA-insured credit union near you.
What happens if you can't pay back a loan to the bank? ›
After you fail to make a few payments, your loan will be considered in default, which essentially means that you've failed to follow through on the terms of your loan agreement. Once you're in default, you can be contacted by debt collectors and even be asked to appear in court.
What happens to my mortgage if my lender fails? ›
If your mortgage company goes bankrupt, you'll still have to make your mortgage payments, but all terms should stay the same. If your loan is active or has just closed, it'll be sold off to another company. If you're in the midst of closing a loan, any escrow funds should be safe, but you'll have to find a new lender.
What are the consequences of bank failure? ›
Bank failures can have severe consequences, including the loss of people's savings and investments, the erosion of trust in the financial system, and even broader economic downturns.
Is money guaranteed if a bank fails? ›
FSCS will pay compensation within seven working days of a bank, building society or credit union failing. You don't need to do anything, FSCS will compensate you automatically. More complex cases, including temporary high balance claims, will take longer and you'll need to contact us to request an application form.
