What Happens to Your Money if Your Bank Fails?

Quick Answer

A bank failure is a rare event, but it can happen. If the bank fails, as long as it’s insured by the FDIC, your deposit will be covered up to $250,000 per depositor per ownership category.

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When a bank fails, the Federal Deposit Insurance Corporation (FDIC) will arrange the sale of the bank customer's assets to a healthy bank, or, less commonly, the FDIC will pay the bank deposits back directly.

Between 2001 and 2022, 561 banks failed, according to the FDIC. That may sound like a lot, but thousands of banks exist in the United States. The truth is, the likelihood of losing your money is extremely small as long as an FDIC-insured institution holds it. In fact, since 1933, no one has lost money due to a bank failure, says the FDIC.

What Happens in a Bank Failure

A bank failure happens when a bank can't pay back its customers or other people it owes money to.

The FDIC is an independent agency of the United States government created in response to the thousands of bank failures that occurred during the Great Depression. The organization was created to restore confidence and stability in the economic system.

One of the main ways it does this is by protecting the money people deposit in banks and savings associations. And unlike other insurances, you don't need to buy deposit insurance; it automatically applies to any deposit account you open at an FDIC-insured bank.

Nearly all banks in the United States are FDIC-insured, which means even if a bank were to fail, your money is protected. The FDIC insures each bank account up to $250,000 per depositor per ownership category, such as single owner or joint owner. If you use a credit union instead of a bank, you'll receive similar insurance coverage through the National Credit Union Association (NCUA). Insurance is one of the primary reasons it's a safer bet to keep your money in a bank account or credit union account than in other places.

Importantly, however, the FDIC doesn't cover or insure investments like stocks, bonds, mutual funds, life insurance policies or annuities (even if these investments are bought at an insured bank).

How the FDIC Helps

When a bank fails, the FDIC steps in to protect you by taking action in one of two ways:

  • The FDIC becomes the "receiver" and arranges a different, healthy bank to take over the failed bank's deposits. The FDIC then transfers your money to another FDIC-insured bank, so you'll have a new account in a different bank where your funds will be safe.
  • The FDIC can also write a check and send it directly to you to cover money from the account at the failed bank.

When Can I Expect to Receive My Deposits?

If your bank fails, it's understandable to be anxious about what happens to your money and what to expect next. The good news is that the FDIC usually pays insurance within a few days after a bank closing, and sometimes as fast as the next business day.

The FDIC says it usually has staff on site the day a bank fails to identify people who have insured money in the bank. Generally speaking, the process is smooth because another healthy bank is ready to buy the old one and continue the process.

How to Keep Your Money Safe From Bank Failures

Although bank failures aren't too common, you can still take steps to reduce risk and protect your cash. Here are some simple ways to keep your money safe from bank failures:

  • Make sure your bank is FDIC-insured. Go to the FDIC website and look up your bank.
  • Monitor the health of your bank by keeping up with financial news articles. By monitoring the health of your bank, you can be aware of any potential problems and take steps to protect your money before a failure occurs.
  • Know that the FDIC has limits on the amount of coverage it provides. The FDIC covers up to $250,000 per depositor per ownership category, so consider opening additional accounts at another FDIC-insured bank if you plan to hold more than $250,000 individually or $500,000 with a joint account holder.

Your deposits are insured even if they are in different types of accounts at the same bank—but only up to the covered amount. For example, if you have a certificate of deposit (CD), savings account and checking account each with $100,000, and no joint account holder, $50,000 of your money is not insured ($300,000 - $250,000).

The Bottom Line

A bank failure is a rare event, but it can happen. If you are worried about your money in the event of a failure, make sure to check that your bank is FDIC-insured. This way, you can rest easier knowing your hard-earned money is protected.