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Uninsured Deposits from a Failed Bank


If you have over the insured limits at a bank that fails, you run the risk of losing that money. Many depositors this year have been lucky. For most of the 29 bank failures this year, no depositors have lost money, even those with deposits over the insured limits. For those cases, the FDIC arranged for another bank to assume all deposits. However, there have been a few cases this year and many cases in previous years of depositors losing their uninsured deposits. One of this blog's readers described losing some his deposits that went over the insured limits (due to accumulated interest) at a bank that failed last year.

This WSJ article describes what has happened to one retiree who had her life savings of nearly $600,000 at Superior Bank in Illinois in 2001 when the FDIC seized the bank due to "alleged improper financial and accounting practices related to its subprime busines." Her uninsured deposits were frozen. Since then the retiree has been receiving payments from the FDIC. So far she has received all but $100,000 of her deposits. Unfortunately, as the article describes, those payments have stopped due to a lawsuit settlement with Beal Bank which "accused the FDIC of misleading it about the quality of a portfolio of Superior mortgages bought from the agency for $340 million."

So as you can see, it can be a very long time to get back all of your uninsured deposits. In the comment section of the article, one commenter asked why the retiree deserved to get back any of the uninsured deposits. Yes, the retiree may have made a mistake to have uninsured deposits, but it's not like she stole the money. It's her money that she likely earned by honest, hard work. However, even though she doesn't deserve to lose that money, it doesn't mean that tax payers owe her the money. The payments that the FDIC was making were not coming from tax payers but assets of the failed bank. Here's how the FDIC describes this process:
Customers with uninsured deposits receive the insured portion of their account as described above. They will wait longer to receive payment for some or all of their uninsured deposits. The amount of uninsured deposits they may receive, if any, is based on the sale of the failed bank's assets. Depending on the quality and value of these assets, it may take several years to sell the assets. As assets are sold, uninsured depositors receive periodic payment on their uninsured deposit claim.

Note I didn't include the excerpt regarding insured deposits. In the rare cases in which the FDIC is unable to find a buyer for a failed bank, the FDIC either transfers insured deposits into a temporary bank which it manages (like what happened to IndyMac) or it mails checks. For more information, see the FDIC's Deposit Insurance FAQs.

Note, you can use Google News to access the article.

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