What happens when a bank collapses?

With over $110 billion in assets, Signature Bank is the third bankrupt bank in US history.

In a statement released yesterday by Treasury Secretary Janet L. Yellen, Federal Reserve Board Chairman Jerome H. Powell, and FDIC Chairman Martin J. Gruenberg, it was announced that SVB account holders will be fully protected and have access to their funds by March 13.

Yet these recent failures have consumers and investors wondering how “safe” their money is.

What is a bank failure?

According to the FDIC, a bank failure is defined as the closure of a bank by a federal or state banking regulatory agency. This usually occurs when a bank is unable to meet its obligations to depositors and others.

In the case of SVB, the culprit was a bank run. This is when depositors rush to withdraw all their funds at once, fearing that the bank will go bankrupt. As more and more customers withdraw their money, it increases the likelihood that the bank will default and run out of cash.

There was a sharp increase in bank failures during the financial crisis from 2007 to 2008, but the banking system has not experienced such large numbers of bankruptcies since then.

How safe is your money?

In the event of bank failure, the Federal Deposit Insurance Corporation (FDIC) steps in to provide insurance coverage up to a certain limit per depositor, per bank, for each class of account ownership. The FDIC also acts as the bankrupt bank’s “receiver,” meaning it sells and recovers the bankrupt bank’s assets and settles its debts, including claims for deposits that exceed the insured limit.

The problem, the FDIC has its limits – knowing what those are can help you better protect your funds.

“The FDIC protects $250,000 in deposits for each depositor and keeping balances below that will certainly protect you from a fallout like the one we’re seeing with SVB,” says Lawrence Sprung, CFP and Founder of Mitlin Financial. “You may have a delay in accessing your funds, which may have consequences of their own, but eventually you will get the funds. It’s just a way to protect those deposits from disappearing, because beyond the $250,000 limit, you’re probably out of luck.

According to the FDIC“uninsured depositors will receive a receivership certificate for the remaining amount of their uninsured funds. As the FDIC sells Silicon Valley Bank’s assets, future dividend payments may flow to uninsured depositors. Those whose account balances exceed $250,000 should contact the FDIC toll-free at 1-866-799-0959.

Where to put your money if your bank has failed

If your bank fails, you will immediately receive written notice from the FDIC by mail. In many cases, you can expect to receive your money in a timely manner. According to the FDICFederal law requires it to make payments for insured deposits “as soon as possible” in the event of an insured institution’s default (usually within days).

If you have been affected by the recent bank closures or find yourself in a similar situation in the future, there are several ways to protect your funds.

1. Bank with an FDIC-insured institution: The FDIC BankFind Suite can help you determine if your bank is FDIC insured, or you can contact the FDIC by phone to verify that your bank is a member.
2. Consider other account types: If your deposit account contains a balance above the $250,000 limit, you have alternative options that allow for a higher limit, such as the Certificate of deposit Account Registration Service (CDARS).

   The catch: a certificate of deposit (CD) requires that you lock in your funds until your CD reaches its maturity date. Touching these funds beforehand could result in a hefty penalty.

   “Many banks also offer cash management solutions that will also provide FDIC insurance above the $250,000 limit. As an example, let’s say you need to keep $1,000,000 in a bank and you want it to be fully FDIC insured. They provide one account for deposits, and then they will split your deposit behind the scenes among five different banks that won’t have more than the maximum of $250,000 each. Banks A, B, C and D each have a deposit of $250,000, then once the interest is credited, the bank will introduce Bank E to ensure that all of your deposits are fully insured,” Sprung explains. “Not all banks have this or do it, so it’s important to know who your deposits are with and what is insured.”

3. Consider opening an account at a local credit union: Another option might be to consider keeping some of your money at a box. “Credit unions are also a good option to see if they can provide you with the coverage and what you need from a banking relationship. They can also allow you to put money in other banks in your area,” says Sprung. Credit unions are insured by the National Credit Union Administration (NCUA) and provide coverage of up to $250,000 per stock owner, per insured credit union, for each class of account ownership. You can visit the NCUA Credit union locator to find an NCUA-insured credit union near you.

The take-out sale

While this recent spate of bank failures may seem shocking, experts say it’s never completely out of the realm of possibility and consumers should know what it means for their money.

“Businesses have problems all the time and banks are no different,” Sprung says. “The difference is we have an inherent trust in the banking system and the FDIC to help protect the interests of the public, sometimes it works and sometimes it doesn’t. What’s important for depositors to understand is how to protect themselves. the financial impact this could cause them.