Could Your Business Fail If Your Bank Fails?

Broken tile with the word BANKThat bad news: So far in 2010, 149 banks have failed, more than the 140 that went out of business in 2009. In fact, more banks have failed this year than in any year since the S&L crisis of the ’80s and ’90s when a total of 747 failed.

The good news: The banks that are failing this year represent only about half the assets of those than failed in 2009, and a third of the assets of those that failed in 2008.

What If the Bank That Fails Is Your Bank?

The Federal Deposit Insurance Corporation (FDIC) insures bank deposits (principal and interest) in member banks. According to their website, “FDIC insurance is backed by the full faith and credit of the United States government. Since the FDIC’s creation in 1933, no depositor has ever lost even one penny of FDIC-insured funds.”

Keep in mind that your money is insured only if it’s in an institution that’s actually a member of the FDIC. It’s not hard to find a bank online that offers attractive interest rates (anything over 1 percent these days) and claims to be FDIC insured, but it’s not. It’s not a bank, and it’s not insured.

If you’re not sure if your bank is insured, visit the FDIC Bank Find website and check.

And to be clear, the FDIC doesn’t insure all your money. FDIC insurance covers checking, NOW, savings accounts, money market deposit accounts, and certificates of deposit (CDs) up to the insurance limit. Even if you purchase from an insured bank or savings association, the FDIC doesn’t insure your investments in “stocks, bonds, mutual funds, life insurance policies, annuities, or municipal securities,” according to their site.

How Much Personal Money Is Protected?

The FDIC will insure up to $250,000 per depositor per ownership category, meaning single owner, joint, trust, and retirement accounts.

A single account is insured for $250,000, and a joint account with your spouse, since there are two depositors, would be insured for $500,000. If you were brave enough to add two kids to the joint account it would be covered up to $1 million because the account has four depositors.

If you also have a revocable trust account, that’s covered up to $250,000, and certain retirement accounts — such as IRAs and Keogh accounts — would be covered up to another $250,000 too.

So, in this example, you’d be covered up to $1,250,000 if your bank failed ($1,750,000 if you included the kids).

How Much Business Money Is Protected?

Let’s say you run an online business with a shopping cart that accepts credit cards, and you’ve set up a bank account where your merchant processor deposits customer payments. And let’s say you also have a personal checking account set up in your name only.

If your business is a sole proprietorship (it’s not incorporated or a partnership), that account is insured as if it was part of your single account — the two accounts together are insured for $250,000.

If your business is a corporation or partnership, the funds they deposit are insured up to a maximum of $250,000. Unlike a sole proprietorship, however, they are insured separately from your personal accounts or any stockholders or partners.

But keep in mind that even if you have separate accounts designated for different purposes, they are not separately insured — they’re added together and insured up to $250,000.

What If I Want To Deposit More Than $250,000?

The simple solution, if you want to make sure your deposits are insured for more than $250,000, is to put the money in different institutions. Note that making deposits to different branches of the same institution doesn’t increase your protection.

What Could Possibly Go Wrong?

The fact is, banks still fail. The FDIC doesn’t send a warning that your bank is going under, and only stupid senators (very publicly) release letters to regulators urging that they take action to prevent a bank’s collapse. The way you find out is when your debit card is denied or you discover your bank has a new name.

If that happens, you might wonder what’s the FDIC insurance claims process? Do you get paid right away? Do you have to wait, and for how long? How do you prove how much you had in your account? What will happen?

The FDIC is accurate in claiming that no one has lost a penny of insured funds. In fact, when the worst has happened, they’ve been known to step in and return a portion of uninsured funds.

But what typically happens if you have more than $250,000 in an account and your bank fails? You become a creditor, just another person in line to get whatever money the FDIC can recover by selling the bank’s remaining assets such as desks and file cabinets.

How Long Will My Money Be Tied Up?

Within a few days, you’ll be doing business with a new bank and your insured funds will be available.

When the FDIC determines a bank needs to be shut down, they obtain bids from other banks and the failed bank becomes part of another entity. New bank personnel and FDIC people will move into your old bank’s offices. They typically use a weekend to re-organize the books and re-open the failed bank as a branch of the new bank by Monday morning. Presto-chango, all customers of the failed bank became customers of the succeeding bank.

If you have balances over the FDIC limit, you become a creditor of the failed bank. The FDIC will sell off the failed bank’s assets and, if they have the money, pay you from the proceeds. That process can take years.

Could Your Business Fail If Your Bank Fails?

If you have deposits well in excess of the FDIC limit, and your bank can’t be sold to another institution, you could lose enough to go under with the bank. But if you pay attention to where you put your money, you will be protected.

First Published in American Express Open Forum on December 15, 2010