Banks

When I was younger, my great uncle used to do all his business in cash.  He explained to me that the farmers he dealt with didn't trust banks and it wasn't unheard of for people to carry around $25,000 in their car or have it stuffed under a mattress at home.  At the time I thought that was crazy, but with banks suddenly going under I'm starting to wonder if those men weren't on to something.

Anyone that's seen the film “It's a Wonderful Life” probably has never been able to get the image of the run on the bank and its subsequent closing out of their mind.  I know it was the first thing that popped into mine when I started hearing that banks were in trouble a few months ago.  However, I realized that I don't know very much about what my rights and risks are when it comes to banks or other financial institutions.  I did some research and it turns out that the single most important thing to know about a bank is whether or not it is insured by the Federal Deposit Insurance Corporation (FDIC).  If a bank is insured by the FDIC it will have a sign in the bank saying so.

It's the FDIC's job to insure deposits.  They've been doing that successfully for 75 years.  When a bank fails, it is turned over to the FDIC who then either sells the closed bank to another bank or settles all the accounts.  Typically the average consumer will not experience too much of an interruption in service.  If another bank takes over your bank, direct deposits to your account as well as outstanding checks will still be processed as they come in.

If the FDIC cannot find a bank to take over a closed bank, they will begin making payouts and settling affairs.  Typically, a single account such as a checking or savings account is insured for $100,000.  The FDIC would send you a check for the amount of money in your account as long as it does not go over this amount.  Anything over the limit will be seen as a claim against the bank and you will have to wait until the dust settles along with other creditors to get your money.

Also, if you have a loan from the failed bank, you will still need to repay it.  The FDIC will send you a letter in the mail giving you instructions on where to send payments.

There are a lot of banks that have failed this year, and several more that are in trouble.  However, that doesn't mean that the people who use those banks need to be worried as long as they do a few simple things.

Make sure your bank is FDIC insured.  Check for that sign in the bank mentioned above.

Talk to a bank representative about your specific accounts.  This is especially true if you have a significant amount of money deposited or accounts that go beyond standard checking and savings accounts (such as trusts or investment accounts).

If you have more than $100,000, consider splitting it between separate banks.  Multiple accounts held by the same bank (i.e. Bank of America) will be lumped together when determining a payout, so even if your $150,000 is spread evenly over three different accounts, you will still only be insured for $100,000.  Therefore, you should instead consider opening an account at a separate bank.  If you have an account at Bank of America and another at Wells Fargo, they are each insured for $100,000.

The bottom line is that, with a little proactive planning, you can make sure your money is safe regardless of what happens to your bank.  And that is very, very good news.  I guess this means that it's still safer to keep your money in the bank than under your mattress.  You'll likely sleep a lot better too!

Related Links:

• The FDIC maintains a list of failed banks.
• Get the facts about bank failure if you are a depositor, creditor, or borrower.