Six years ago I did a blog post reviewing two common misconceptions about the FDIC and the NCUA. This was before the financial crisis began. At that time bank failures were rare. Consequently, misconceptions were widespread. Since that time we have seen hundreds of bank failures, so I think most regular readers of this blog know the facts about the FDIC and NCUA. Nevertheless, I thought it would be useful to provide an updated review of these two misconceptions.
The misconceptions that I reviewed were 2 of the 10 covered in this 2006 FDIC consumer education article, Top 10 FDIC Misconceptions. One big change to FDIC coverage since that time is an increase to the standard deposit insurance limit from $100,000 to $250,000. The NCUA which insures credit unions also has this same limit.
There are many ways to increase coverage over this limit. I reviewed an easy way via beneficiaries in this post, Maximizing Your FDIC Coverage with Beneficiaries. As I mentioned in that post, it's important to fully understand the rules if you go above $250,000. It's up to you to ensure all of your money is FDIC insured. It doesn’t matter to the FDIC if your bank made a mistake.
The top 2 FDIC misconceptions that I've encountered include: 1) You do not get the interest earned, only the principal when a bank fails, and 2) It may take years before they release all your funds. If you keep below the insured limits, neither of these are true.
Here's what that FDIC article states about the first misconception:
Federal law requires the FDIC to pay 100 percent of the insured deposits up to the federal limit - including principal and interest.
It should be noted that for the vast majority of the bank failures over the last 4 years the FDIC has been able to find other banks to assume all deposits. In these cases the FDIC doesn't pay out anything. Another bank takes over the failed bank's operation. In 2008 it became common for the FDIC to arrange agreements with the acquiring banks to assume all deposits, even deposits over the FDIC limit. This wasn't always the case. For example, when the FDIC arranged for ING Direct to take over NetBank in 2007, ING Direct only assumed insured deposits (see post).
The second top misconception is that it can take years before the FDIC will release your insured deposits. Here's what the FDIC states:
Federal law requires the FDIC to pay the insured deposits "as soon as possible" after an insured bank fails. Historically, the FDIC pays insured deposits within a few days after a bank closes, usually the next business day. In most cases, the FDIC will provide each depositor with a new account at another insured bank. Or, if arrangements cannot be made with another institution, the FDIC will issue a check to each depositor.
This also doesn't apply to the vast majority of the bank failures when the FDIC finds another bank to assume all deposits. In these cases, the acquiring bank typically continues the operation of the failed bank without any immediate changes.
The FDIC can't always find buyers. These are rare, but they still happen. The last one was on February 24, 2012 when Home Savings of America failed. One of this blog's readers reported that he had accounts at Home Savings of America. He received a check for his deposits on March 1st, less than one week after the bank failed.
Receiving checks from the FDIC after a bank failure hasn't always been as quick as the above example. There were two interesting cases in 2009 when Community Bank of Nevada failed. The FDIC wasn't able to find buyer so it mailed checks to depositors. A reader had a CD at the bank before it was closed. The FDIC tried to mail him the check, but they used the wrong address. It took several weeks before he was able to get his money. Another reader was more fortunate. The check for his CD arrived just one week after the closure. He said he deposited the check into his Chase account, and Chase placed a 7-day hold on it. So it may take more than one week before you receive the check and have access to the funds. However, I have never seen a case in the last four years where it has taken more than a month or two.
Useful FDIC References:
- Deposit Insurance FAQ
- FDIC Comprehensive Seminar On Deposit Insurance Coverage For Bankers (pdf)
- FDIC's Electronic Deposit Insurance Estimator (EDIE)