What Happens When a Bank Fails? – FDIC Part V
- May 2, 2023
Federal law requires the FDIC to make payments of insured deposits “as soon as possible” when a bank fails. Depositors with uninsured deposits in a failed member bank may recover some or all of their money depending on the recoveries made when the assets of the failed institutions are sold. There is no time limit on these recoveries, and it sometimes takes years for a bank to liquidate its assets.
Closing its doors
If a bank closes its doors and is acquired by another member bank, all direct deposits, including electronic paychecks or Social Security checks, are deposited into a customer’s account at the new bank. The FDIC tries to make temporary arrangements with another institution so that direct deposits and other automatic withdrawals can be processed until permanent arrangements can be made if a bank can be found to take over the failed one.
There are two common ways that the FDIC takes care of bank insolvency and bank assets. The first is the purchase and assumption (P&A) method, in which a different bank assumes all deposits while also buying some or all of the loans or assets of the failed bank. The failed bank’s assets are put up for sale, and open banks can submit bids to purchase parts of their portfolio.
The FDIC may sell all or some assets with a put option. This allows the winning bidder to take back assets transferred under certain circumstances. All asset sales reduce the net liability to the FDIC and insurance fund for bank losses. The FCIC may use the payoff method if it doesn’t get a bid for a P&A transaction, in which case it pays off insured deposits directly and attempts to recover these payments by liquidating the receivership estate of the failed bank. The FDIC determines the insured amount for each depositor and pays them directly, with all interest up to the date of failure.
The Bottom Line
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