In almost any good-sized city, many of the largest buildings are likely to be bank buildings. Being housed in an impressive edifice sends a not-too-subtle message: "Our bank is solid and successful. We're here to last." After all, bankers know that gaining and retaining depositor confidence is essential. If customers lose faith in a bank, then that institution is in serious trouble. Wary depositors will act quickly to take their money elsewhere.
If you've seen Mary Poppins or It's a Wonderful Life you have some idea what a "bank run" is like. Concerned customers rush to retrieve their cash before an expected collapse. Fortunately, bank runs occur infrequently in the U.S., thanks largely to the advent of federal deposit-insurance in the 1930s. But bankers still know that customer confidence is a fragile thing.
In 2008, many depositors grew anxious when noted economist Nouriel Roubini of New York University warned of a "systemic banking crisis" resulting from rising mortgage defaults and unrecoverable consumer debt. He predicted that "hundreds of banks [would go] belly up." In response to growing public concern, one of America's largest banks sent a mass mailing to its depositors, stressing that the bank was "solid," "strong," and "resilient." The American Bankers Association — the banking industry's trade group — issued a list of "talking points" to member banks, urging them to emphasize that banks are "well-positioned to handle economic downturns" and that "customers' deposits are protected."
The banking blowout Roubini predicted may have been mitigated by Federal Reserve action that pumped billions into the banking system, but even so more than 450 U.S. banks have failed since the beginning of 2008, according to the Federal Deposit Insurance Corporation (FDIC). Only about 40 of those failures have occurred this year, most involving relatively small banks with less than $200 million in assets. But larger banks can fail too. In January, Tennessee Commerce Bank, a billion-dollar bank near Nashville, went under.
When a bank fails
Typically, a failed bank re-opens quickly — with new owners and under the close supervision of banking regulators. It is not uncommon for a failed bank to be closed by the FDIC or state banking officials late on a Friday afternoon — with no prior public notice — and be re-opened the following Monday under new ownership and a new name. In most cases, the transition is a relatively smooth process. And the FDIC makes sure there is ample cash on hand when the "new" bank opens, just in case more than a few cautious customers decide to take their business elsewhere.
The good news is that losing money in a bank failure is unlikely. Under legislation passed during the 2008 financial crisis — and since extended — the FDIC covers each depositor up to $250,000.Important: The federal coverage is $250,000 per depositor at an insured bank, not per account. In other words, if you have multiple accounts at the same bank, each is not insured separately. But the "per depositor" rule works another way too: joint accounts — which legally have multiple owners — are covered up to $250,000 per owner. So a husband/wife joint account, for example, would have $500,000 in coverage, assuming the couple had no other accounts that applied against the insurance limit. (Some financial products offered through certain banks are not FDIC insured, such as mutual funds and annuity contracts.)
While $250,000 (or $500,000) in deposit insurance is plenty for most savers, wealthier savers should be careful to spread their risk. This simply involves dividing one's savings among multiple insured banks, making sure that the total in any one bank stays below the FDIC limit. In this way, all accounts will be insured separately.
Of course, many wealthy people (as well as businesses and nonprofit groups) have money saved in certificates of deposit. Multi-million dollar protection is available for CDs via the Certificate of Deposit Account Registry Service (CDARS). Rather than having to deal directly with multiple banks to gain extra insurance coverage, a client makes a deposit with a single CDARS-member bank.
The bank handles the chore of splitting the deposit into smaller chunks and spreading those chunks among other FDIC-insured banks in the CDARS network. The amount assigned to any given bank is kept below the federal $250,000 limit, thus effectively providing insurance protection for the entire CD investment, even if the total amount far exceeds the FDIC cap.