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When a bank fails, it brings along with it a rush of anxiety for its customers. What happens to your money, and where do you go next?
Though bank failures have been less common in recent years, 2023 has seen a few dominate the news cycle. Silicon Valley Bank (SVB), Signature Bank and First Republic Bank all went down within two months of each other, causing thousands of Americans to question what would happen to their funds.
The good news is as long as your banking institution is insured by the FDIC (Federal Deposit Insurance Corporation), your money should be safe. The government agency’s primary purpose is insuring your money in case of bank failure.
Can a Bank Lose Your Money?
Technically speaking, yes. Most banks don’t actually keep customers’ entire deposits on hand. The Federal Reserve typically only requires institutions to keep about 10% of deposits on hand in the form of cash, although that number can be reduced to 0% during a recession or crisis. This happened in 2020 during the Covid-19 pandemic, and a reserve requirement has still not been reinstituted.
Any deposits not in reserve are usually lent to other customers in the form of loans and credit cards so the bank can earn money on them. Because of this, it is possible for a bank to lose your money. When an institution is no longer able to provide enough liquidity for its depositors and creditors, the FDIC takes action to close the bank.
However, most reputable banking institutions protect customer funds against this circ*mstance through the FDIC. FDIC-insured accounts typically cover up to $250,000 per depositor for each account ownership type and institution.
What Happens if a Bank Fails?
When a bank can no longer meet the demands of its depositors and other creditors, the FDIC takes action to close the institution. Typically, this involves arranging the sale of the failed bank’s accounts to a healthy institution. When that happens, customers have access to their funds immediately with the new bank.
For instance, when First Republic Bank failed in May of 2023, deposits were sold to JPMorgan Chase. All previous First Republic accounts were automatically converted to Chase accounts.
If your financial institution is sold to a new bank, the new bank will contact you with account information and answer any questions about your debit cards, checks or pending payments—which are all typically still functioning for a brief period after the original bank failure.
In less common cases, the FDIC will pay off the failed bank’s depositors up to the insured amount—$250,000 per account ownership type. If you have more than that amount with the institution, the failed bank’s estate is responsible for the remainder. In that case, you might have to file a claim to get the rest of your money.
In this case, pending payments and checks will no longer be processed, as they will reflect that the bank is closed. This won’t affect your credit score, but you will need to ensure any outstanding payments are taken care of using another source of funds.
This process is only relevant for banks. Credit unions follow a similar approach but are usually insured by the NCUA (National Credit Union Administration) instead of the FDIC.
What Happens to Your Money if a Bank Closes?
If a bank closes, what happens to your money depends on whether the account is sold to another institution or the FDIC takes responsibility for paying out depositors.
In most cases, accounts are sold to another bank, and you will automatically have access to your funds at the new institution. Funds should be available immediately.
In the case of FDIC payments, the agency aims to pay out customers as soon as possible after their bank failure. That is typically around two business days.
If your deposit at the closed bank was in the name of a trust or through a fiduciary, it might take longer to get your funds. This is because you’ll likely be required to provide documentation proving ownership or wait for the money to pass through the fiduciary.
How To Keep Your Money Safe From Bank Failures
The most important step you can take to protect your deposits is to ensure your institution is FDIC-insured. You can use the FDIC website to search institutions and find one that works for you.
It’s also a good idea to keep an eye on the status of your bank and monitor news trends, especially during a recession. If you’re worried about bank failure, you might consider transferring your funds to another institution. Additionally, if you have more than the insured limit in a single account—$250,000—consider alternative ways to insure your excess funds.
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FAQs
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.
Can you lose your money if a bank closes? ›
The FDIC insures bank accounts for up to $250,000 per depositor, per ownership category, per bank. If a bank fails, insured deposits will be moved to another FDIC-insured bank or paid out. You'll usually get a Receiver's Certificate for money that isn't covered by FDIC insurance.
What happens to my money if my bank account is closed? ›
If you have money in the account at the time it's closed, the bank is required to return it to you minus any outstanding fees. If an automatic deposit goes into that account after it's closed, those funds must also be returned.
What happens to your debt if the bank collapses? ›
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.
Can banks seize your money if the economy fails? ›
Your money is safe in a bank, even during an economic decline like a recession. Up to $250,000 per depositor, per account ownership category, is protected by the FDIC or NCUA at a federally insured financial institution.
Do you get your money back if a bank collapses? ›
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.
Can a bank refuse to give you your money? ›
Yes. Your bank may hold the funds according to its funds availability policy. Or it may have placed an exception hold on the deposit.
How do you get your money if a bank closes your account? ›
What happens to the money in a bank account if closed? If your bank account is closed with a balance remaining, the bank will issue a refund, typically by mailing you a check. If the account is closed due to suspected criminal activity, the bank has the right to freeze your assets.
Can you withdraw money from a closed bank account? ›
A closed account refers to a deactivated or terminated account; in other words, it's no longer open and available for deposits and withdrawals.
How long does it take to get money back from a closed bank account? ›
How long does money take to bounce back from a closed account? The timing for getting money back after a payment is sent to a closed account can vary depending on the situation and involved financial institutions. However, it may potentially take up to several weeks for a misdirected transaction to get refunded.
When banks fail, the most common outcome is that another bank takes over the assets and your accounts are simply transferred over. If not, the FDIC will pay you out. Funds beyond the protected amount may still be reimbursed, but the FDIC does not guarantee this.
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.
Is your money safe if a bank collapses? ›
So in simple terms, if your bank were to fail, the FSCS aims to get any savings up to this amount back to you within seven working days. To see if your bank's protected, use the Financial Services Compensation Scheme's checker.
Should I take my money out of the bank in 2024? ›
FDIC insurance coverage guarantees up to $250,000 per depositor, per insured bank, for each account ownership category. This means that if you have multiple accounts with the same bank, each account is insured separately up to $250,000.
Should I pull my cash out of the bank? ›
You should only take your money out of the bank if you need the cash. In the bank, cash is less vulnerable to theft, loss and disaster. And depending on the bank account, you could be earning interest on your cash that you won't be earning if it stays under your mattress.
Where is my money safest during a recession? ›
Where to put money during a recession. Putting money in savings accounts, money market accounts, and CDs keeps your money safe in an FDIC-insured bank account (or NCUA-insured credit union account). Alternatively, invest in the stock market with a broker.
Do you get your money back if a bank closes your account? ›
What happens to the money in a bank account if closed? If your bank account is closed with a balance remaining, the bank will issue a refund, typically by mailing you a check. If the account is closed due to suspected criminal activity, the bank has the right to freeze your assets.
Can bank keep your money after closing? ›
Of course, the bank must return any remaining funds in your account but may hold on to them to cover any negative balance or fees. In some cases, the bank may hold the funds if your account is flagged for suspicious activities, which is increasingly common.
How bad is it when a bank closes your account? ›
While closing a bank account typically doesn't have a direct impact on your credit score (like, say, having your credit card closed on you), it could become a problem if your account has any outstanding balances, such as unpaid overdraft fees.
