Protect Yourself From Bank Failures

IndyMac Bank was taken over by regulators, and more banks possibly will follow. If you're worried about your bank, learn how to prepare for the worst.

It was 1985 when The Style Council sang "Walls Come Tumbling Down," but the lyrics sure sound relevant today. If you've been tuning into the latest onslaught of bad economic news, you may be wondering if your bank will be the next to follow in IndyMac's footsteps.

No 30-day notices

The FDIC is in the business of insuring bank deposits, but it's not in the business of sending out warning letters. If your financial institution fails, you aren't going to know about it ahead of time. The information will appear when you see the story on the evening news, or when you show up at the branch to find a notice posted on the door. By then, it's too late for you to take any action to protect yourself; all you can do is follow the directions and hope for the best.

Most of the time, a bank failure will cause relatively little disruption to your daily life. The regulators tend to step in quickly, find another entity to buy the bank, and get the operation running again in just a few days. During that window of time, you should have access to your insured deposits via check or debit card. These transactions will be processed once the bank reopens under its new ownership.

Worst case scenarios

Problems can arise if the regulators aren't able to find a buyer for the bank right away, or if you have money on deposit that exceeds the FDIC insurance limitations. Where there's no buyer for the failed bank, the institution will remain closed and transactions won't be processed. Debit cards won't work, and checks that are in the system will be returned, unpaid. You can expect the FDIC to send you a check for your insured deposits, but this may take several days to arrive.

If you have more money on deposit than is covered by the FDIC limitations, you'll have to wait longer to get your funds. Technically, you become a high priority creditor of the failed bank's receivership. The FDIC will start selling off the bank's assets, and make payments to you and other creditors as funds are generated. You may get back all of your money eventually. But then again, you may not.

Precautionary measures

Before your bank fails, you'll want to study up on the FDIC insurance limitations and restructure your deposits so that you're fully covered. If you have less than $100,000 on deposit at your bank, relax; you're fully insured. If you have more than that, you'll have to review the ownership of your accounts to determine what's protected. Ultimately, you may have to spread your money among several different banks to get full coverage. But that's a small price to pay when you're trying to keep the walls from tumbling down on you.