The U.S. Banking Industry is on high alert right now. After 3 regional bank failures this month investors, regulators and depositors have started to worry if the banking industry can hold up to the pressures it is currently facing. Thanks to the FDIC and the Federal Reserve, small and regional banks are getting help to ensure there is enough liquidity and credit available to prevent a recurrence of 2008. I thought it would be interesting this week to discuss what happens if your bank fails.
Who Is The FDIC?
The Federal Deposit Insurance Corporation is a government agency that provides insurance to individuals who deposit funds to commercial and savings banks. The FDIC was created by the Banking Act of 1933, during the great depression. The objective of this Act was to restore trust in the U.S. banking system that at the time suffered from frequent bank runs [More About The FDIC].
Almena Bank Failure 2020
In 2020, a small bank in Almena KS, had to close its doors after taking on a high risks growth strategy. In October 2020 the FDIC took over Almena because it considered the bank to be “critically undercapitalized.”
According to the FDIC, the bank’s failure was due to improper governance. Sounds familiar? Well SVB and Signature bank were both accused of having improper governance which resulted in both banks failing. The Chairman of Almena Bank’s Board decided to expand its operations through the aggressive offering of government backed loans and higher cost whole sale funds. This action by itself is not an issue. It was the bank’s management who lacked the knowledge and experience to foresee and mitigate credit and liquidity risks caused by implementing that strategy created the perfect recipe for potential bank failure. Professionals who are usually equipped to manage these types of banking risks are the Chief Risk Manager and the Chief Financial Officer. As a result of the bank’s aggressive growth strategy, when it started experiencing asset quality problems, its capital decreased thus threatening its viability.
Recognizing that Almena Bank began facing asset quality challenges, between 2016 – 2020 the FDIC performed periodic assessments to ensure it adheres to requirements that had to be met for the government to guarantee their loans. Over that time, however, the bank’s capital continued to deteriorate. In May 2019 the FDIC considered the bank to be “undercapitalized” and by July 2020 it was “Critically Undercapitalized”. The Office of the Inspector General, after its detailed review of the bank’s financials, determined that the bank’s failure was largely due to a failure in management rather than any type of fraudulent activity.
Did Depositors Get Their Money Back?
This story has a happy ending! Similar to SBV and Signature Bank, the FDIC guaranteed all depositors that they would be returned their deposits in full. Even accounts with over the $250,000 limit. Almena was then acquired by another local bank that took over all their deposit accounts and assets.
What Happens If Your Bank Fails?
Well, if your accounts are FDIC insured they are safe. And as history has shown us, the FDIC is willing to ensure that depositors receive all their deposits back. Even those above the insured limit. So, what happens if your bank fails today? Well the FDIC would ensure you’re made whole. You’d most likely get all your deposit back.
What Type Of Accounts Are FDIC Insured?
Accounts insured by the FDIC are:
- Checking accounts
- Negotiable Order of Withdrawal Accounts
- Savings Accounts
- Money Market Accounts
- Time Deposits such as Certificate of Deposit Accounts
- Cashier checks, money orders and other official items issued by a bank.
What Type Of Accounts Are NOT FDIC Insured?
Accounts NOT insured by the FDIC are:
- Stock Investments
- Bond Investments
- Mutual Funds
- Crypto Assets
- Life Insurance Policies
- Safe Deposit Boxes
Learn more about personal banking by reading [Savings Account Alternatives For Beginners]
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