January 31, 2012


Credit: Paul Brentnall
“KerPlunk”, “Wham”, and “Splat” are all good vintage Batman onomatopoeias. They are also applicable words to describe the performance of the 444 banks that have failed since October 1, 2000 according to the Federal Deposit Insurance Corporation (FDIC). It was originally big news, but now that so many banks have failed, many people hardly notice when another one bites the dust. I confess that I was one of those people until a couple of months ago when I saw that one of the most recent bank failures was in my hometown of Jonesboro, Georgia. That was too close for comfort and made me want to learn more about how banks fail, what actually happens when they fail, and what I needed to do to protect myself in case my bank failed. I thought I would take a moment and share my findings with you.

Have you ever wondered how banks make money? It’s not by keeping your money locked up in their safe, paying their employees to watch over your money, and paying you a tiny bit of interest each month. Banks make money by taking your money and loaning it to other people at an interest rate much higher than the bank is paying you, by investing your money in regulated investments or government bonds that normally yield slightly more than the interest rate the bank is paying you, and by charging their customers fees. Out of those sources of income, what gets banks in trouble is the loaning your money to other people part. You see, when banks have made too many loans to people who default, they no longer have enough cash to both pay their bills and to provide their depositors cash on demand. And when a bank cannot pay its bills or provide cash to its depositors when they demand it, it fails.

When a bank fails, the FDIC takes over. The FDIC is an independent federal agency whose mission is to “promote public confidence and stability in the nation’s banking system.” The FDIC usually takes over failed banks on Fridays and tries to offer the customers a seamless transition to their new FDIC-run bank by the following Monday. You cannot predict bank failures because the FDIC has usually already taken control of the bank before the bank failure is ever even announced. This transition process doesn’t usually require any paperwork by customers, and their ability to use ATMs, access safety deposit boxes, and make deposits is usually uninterrupted. The only headache is that customers may be restricted from withdrawing their money for a few days. This restricted access is to ensure that there is not a run on the bank and to give the FDIC time to restore the bank’s ability to meet its financial obligations. The important thing to realize is that NO depositor has ever lost a penny of insured deposits since the FDIC was created in 1933. After the FDIC restores the bank’s ability to meet its financial obligations, it will begin looking for a strong bank to sell the acquired bank to so operations can fully return to normal.

So what do you need to do to protect yourself from bank failures? Two things:

  1. You need to make sure your bank is FDIC insured. Most U.S. Banks are FDIC insured, but if yours isn’t and it fails, then the FDIC will not be there for you.
  2. You need to make sure you do not have more than $250,000 per depositor in any one bank because that is the maximum deposit amount that the FDIC guarantees. (If Mike had $300,000 in a checking account and his bank failed, he would only be given back $250,000.)
Number 2 is a good problem to have.



  1. Is my bank FDIC insured? Yes! Do I have more than $250,000 in my bank? No! But I agree, Tom, that would be a nice problem to have! Thanks for the info!

  2. FDIC has unlimited insurance protection through 12/31/2012 for all "non-interest bearing" accounts as long as the institution is FDIC insured. Not sure what is going to happen after that - but it at least gives you time to move some money around.

    1. Thanks and good point. The important thing to realize though is that a vast majority of bank accounts are interest-bearing. If your bank pays you interest on your account, even if it's a really small amount of interest, the $250,000 limit is what currently still applies.