If My Bank Collapses, How Long Before The FDIC Pays Up?

If your FDIC-insured bank implodes, how long does it take for the FDIC to start paying depositors? Ever since IndyMac imploded, the question has no doubt been on many people’s minds. One reader emailed me saying that he had asked the his banker about how long it might take. Allegedly, the banker squirmed around before finally saying that the FDIC had 20 years to pay people back. This is not true.

In reality, there is no statutory “upper limit” for when they have to pay you back by. Instead, the Federal Deposit Insurance Act states that the FDIC is required to pay insured depositors “as soon as possible.” (see 12 USC 1821(f)) In practice, this usually means the next business day, or within a few days. Here is a relevant section from an FDIC brochure:

When can I expect to receive my money?
Federal law requires the FDIC to make payments of insured deposits “as soon as possible” upon the failure of an insured institution. While every bank failure is unique, there are standard policies and procedures that the FDIC follows in making deposit insurance payments. It is the FDIC’s goal to make deposit insurance payments within two business day of the failure of the insured institution.

Note: Some deposits that require supplemental documentation from the depositors, such as accounts linked to a formal written trust agreement, funds placed by a fiduciary on behalf of an owner such as a deposit broker or deposits placed by an administrator of an employee benefit plan may take a little longer. The timing of the completion of the deposit insurance determination is based solely on the depositor providing the documentation needed by the FDIC to determine insurance coverage.

There’s plenty of things to freak out about in life. The FDIC’s ability to pay you promptly should your FDIC-insured bank kick the bucket is not one of them.

12 USC 1821(f)
When a Bank Fails – Facts for Depositors, Creditors, and Borrowers [FDIC]

(Photo: Ryan McFarland)

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  1. Exek says:

    Question some of the smaller banks are offering private insurance above the usual FDIC limit. How safe is that? here’s a link to a local bank near me that is advertising as a way to get new business. [www.stonesav.com]

  2. humphrmi says:

    @Exek: That bank is insured by DIF, Depositors Insurance Fund. DIF was established by the State of Massachusetts after the great depression to insure deposits in MA banks. It was a model for the FDIC. They indeed cover deposits over $100,000 in Massachusetts chartered savings banks. At their website, Stoneham Savings Bank is listed as one of their member banks.

    [www.difxs.com]

  3. JoeTan says:

    does it bother anyone that we’ve gotten to this point? We have to wonder if the friggin bank is going to GIVE US OUR MONEY BACK????

  4. FMFats says:

    If you are looking for a convenient way to obtain FDIC insurance on funds in excess of $100K, check out the CDARS system. http://www.cdars.com explains the deal.

  5. secondgreatdepression says:

    That is how the FDIC is *supposed* to work, yes. And often that is indeed what happens when banks go under and the feds have to come to the rescue.

    The problem today is, what happens when more banks go under at once than is normal? The FDIC currently has somewhere around $56 billion at its disposal but the total insured deposits in US banks are far above that figure. Normally that’s not considered a problem because total collapse of the system – or even the failure of a few big banks with total insured deposits above $56 billion – was considered unthinkable.

    Not any more. Many economic observers – and I’m talking reputable people, not just the wacko Ron Paul crowd – are worried about the possibility of a systemic banking crisis. Bank Implode-o-meter has a list of banks in dangerous waters, a list that includes biggies like WaMu and Wachovia. There was an article in the NY Times in the last week or two, the link escapes me at the moment, which noted that within the last 30 years several nations have had major banking crises, including industrialized nations like Spain, Sweden, and Japan.

    If a significant number of mid- and large-size banks goes under in a short period of time the FDIC will find itself unable to guarantee more deposits without a new infusion of federal cash. That may happen, it may not – and if it does happen it may not happen quickly. The wheels of Congress grind slowly.

    In short, it seems foolish to assume that FDIC insurance is a guarantee that your money will be there when you need it. Consumers would do well to spread the risk – have savings in multiple banks, don’t keep a whole lot of money in checking, and consider keeping a couple thousand in cash at a safe, hidden place at home just in case things get really nasty and your ATMs and banks don’t work.

    If you follow the latter option, be sure to get a mix of denominations. A bunch of $100s isn’t going to get you far at the grocery store. And even though that may seem paranoid to some, keeping cash at home is also useful in the event of a natural disaster, particularly a prolonged power outage.

  6. @Exek:

    Private Insurance has always been available…. FOR BIG Depositors to purchase.

    If you got those kind of $ laying around I would strongly suggest diverifying the locations/names etc of your deposits than purchasing the Private Insurance or trusing a bank that purchases the Private Insurance for you. Who knows how well that Private Insurance company will actually pay a claim.

  7. @Exek & Corporate-Shill: At the DIF site’s information page they state at the bottom, “Depositors automatically receive this added insurance benefit at no cost whenever they make a deposit to a new or existing account at a DIF member bank.”

    Why is that wait for other shoe to drop alert going off now?

  8. Colage says:

    @secondgreatdepression: Every insurance entity, be it a private corporation like State Farm, or GEICO, or public ones like FDIC or PBGC, are going to be covering more value than what they have on hand. That’s the way it works.

    But, the FDIC is covered by the full faith and credit of the US Government, which isn’t exactly in peril. So if there’s $57bn in claims and there’s only $56bn in assets, they’ll cough up the extra billion dollars.

  9. jwinston2 says:

    @secondgreatdepression:”not just the wacko Ron Paul crowd”

    I stopped reading at this point. Glad you think fiscal responsibility is wacko. Here is your cookie.

  10. floraposte says:

    @secondgreatdepression: The head of the FDIC, who admittedly may be inclined toward a particular viewpoint, has made a reasonable argument for the unlikelihood of failure sequences that would exceed the FDIC’s insurance capabilities. Usually about 13 percent of the banks on the troubled list fail; the total troubled list has assets of $26 billion; the FDIC has about $53 billion for repaying depositors. IndyMac took a chunk of that, but it was also uncharacteristically big–usually big banks are more stable than small ones. And they’re also taking in premiums all the time so the funds are replenished.

    In light of my modest assets, I’m almost certainly incurring considerably greater financial risk by keeping a thousand dollars around the house, where it’ll be subject to degradation by inflation for sure, and where its chances of disappearance through fire, flood, or burglary is probably greater than the chances of the FDIC being unable to fulfill its obligations in its usual time frame.

  11. FHJay says:

    @jwinston2 Fiscal responsibility isn’t wacko, but Ron Paul is. Solely because someone advocates an idea that makes sense does not make them any less insane.

  12. Exek says:

    @humphrmi: Thanks for the info

  13. DoctorMD says:

    Anyone know if safe deposit box contents are considered a deposit? When they lock their doors and have the police threatening people it does not look like you can access your property. Is there a requirement for access to the boxes?

  14. DoctorMD says:

    Answered my own question:
    When can I have access to my safe deposit box?
    When the failed bank’s deposits are assumed by a healthy bank, the branch offices usually reopen the next business day. At that time, you will have access to your safe deposit boxes. In the event of a depositor payoff, the FDIC will send a letter to you informing you of the closing. The letter will instruct you on how you can remove the contents of your box. Access to the safe deposit boxes is typically granted to the safe deposit holders the next business day after the closure.

  15. ColoradoShark says:

    @JoeTan: Will Rogers said, “I’m not worried about the return on my investment but the return *of* my investment”. He still has a point after all these years.

  16. SharkD says:

    The next question is: How long before the FDIC collapses?

  17. johnva says:

    @sharkd: You’ll have bigger problems than accessing your bank account if the FDIC collapses.

  18. brokenimage says:

    Fractional Reserve Banking has to come to end sometime?

  19. dako81 says:

    @sharkd: FDIC won’t collapse. They’ll just print off more money or borrow it from another country and we’ll have hyperinflation instead of collapse.

  20. quail says:

    I had a grandparents who lived through the depression. They never trusted banks fully after that. Oh they had checking accounts but money was also squirreled all over their house. My cousins used to joke about their mason jars and their lumpy mattress. Now I think I understand their paranoia.

  21. AstroPig7 says:

    @secondgreatdepression: Rock! Neither of my banks is on the warning list.

  22. mrgenius says:

    Indymac is supposed to be paying those depositors of record with less than or equal to $100k ($250k for IRA) on or around August 7. You don’t get any accrued interest as of 7/11.

    If you have any amounts above and beyond that, they are supposed to credit 50 cents on the dollar now and the rest puts you into the creditor class.

    This FDIC stuff is why I usually advocate keeping funds in a brokerage account with SIPC insurance. Most of the large brokers have excess SIPC insurance so that if they fail, you will get back the whole amount. And any securities you have will be returned to you in certificate form because they are not allowed to comingle their assets with their clients’.

  23. Orv says:

    A bigger question, in my mind, is how soon the funds will be made available by whatever institution you transfer the funds to. After IndyMac collapsed there were reports that other banks were holding checks for up to eight weeks. It doesn’t mean much that the FDIC will cut you a check the next business day if no one will actually honor it.

  24. mdn says:

    My mother got her money back from 2 IndyMac CDs yesterday, 7/29.

    It appears that the interest stopped accruing about 7/13.

  25. Treefingers says:

    @FHJay:
    Because trusting in a privatized central monetary system that SELLS money to the US government at INTEREST isnt wacko or anything. Ron Paul for President!