Authored by Mark Lobb & Tessa Vellek
In the wake of the Signature Bank and Silicon Valley Bank failures, and with other regional banks potentially on the brink of collapsing, it’s worth considering what happens when a bank fails and what you can do to protect your assets.
What happens to your assets and accounts when an FDIC-insured bank fails?
When a bank fails, the FDIC first tries to arrange a sale to a healthy bank. When this happens, assets are typically transferred to the care of an acquiring organization. This means that all your deposits, as well as trust accounts that hold diversified investments, are simply transferred to another bank, and you will have the option of separately taking possession of assets from the bank and housing them at a different financial institution. In this scenario, the bank ownership and management changes, but all your assets are simply transferred. And as for investments at a bank’s trust department, a bank failure that requires trust assets to move to a different financial institution would not, by itself, trigger a distribution. The trustee would simply need to take possession of the trust assets and find a new place to keep them.
When a sale doesn’t go through, more questions arise.
Will FDIC deposit insurance help?
FDIC insurance covers checking, NOW, savings accounts, money market deposit accounts, and certificates of deposit (CDs) up to $250,000 that a person, trust, or company holds in an insured bank. But the FDIC does not insure investments in stocks, bonds, mutual funds, life insurance policies, annuities, or municipal securities. FDIC’s deposit insurance coverage “is based upon the ownership rights and capacities in which deposit accounts are maintained at insured depository institutions.” 12 C.F.R. § 330.3(a). This means that all deposits in accounts owned by one person or company and located at one bank are added together and insured in total up to $250,000. Id. Deposits are not separately insured even if the deposits are held in multiple accounts at the same bank or different branches or offices of the same bank. 12 C.F.R. § 330.3(a-b).
When a bank fails, the FDIC will pay depositors up to the insured limit of $250,000 within a few days of the bank’s failure. However, any amounts held in excess of this $250,000 usually take several years in lengthy litigation to recover, if they are recovered at all.
How can you maximize FDIC deposit insurance?
If a person or company owns multiple accounts at different banks, then the deposits are separately insured. 12 C.F.R. § 330.3(b). In other words, if a person or company has a certificate of deposit at Bank A and a certificate of deposit at Bank B, the amounts would both be insured separately up to $250,000, rather than in aggregate. This offers an opportunity for individuals and businesses to insure a total of more than $250,000 if they open several different accounts each at separately chartered insured banks and hold up to $250,000 in each of these accounts.
An alternative for companies to obtain full insurance coverage in excess of $250,000—though more complicated—is to incorporate multiple subsidiary companies and then divide deposit amounts between different accounts owned by the subsidiary companies. 12 C.F.R. § 330.11(a, d). In this scenario, the different accounts could be located at the same bank. However, to get separate FDIC insurance, each of the subsidiary companies would have to be engaged in an “independent activity”—i.e., operated primarily for a legitimate business purpose and not solely increase deposit insurance. 12 C.F.R. § 330.1(g).