By Tom Streissguth, eHow Contributor
Bank failures have become an increasingly common phenomenon in the current recession. When a bank can no longer meet federal guidelines for liquidity and asset-to-liability ratios, it is closed and taken under the control of a federal agency. In most cases, the bank is sold to a different institution, renamed and quickly reopened for business. Customer deposits in checking and savings accounts are protected up to a maximum amount, which varies with the account type.
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The Federal Deposit Insurance Corporation (FDIC) is a federal agency that was founded in 1933 with the purpose of protecting bank depositors against the loss of their money in bank failures. The FDIC played an important part in restoring the public's confidence in the banking system during the Great Depression. Since its founding, the FDIC has never failed to redeem any funds lost by insured depositors, up to the maximum amount, which has varied over the years.
FDIC insurance is extended to all of a bank's deposit accounts by federal law. These include checking and savings accounts, as well as money-market accounts, trust accounts and certificates of deposit (CD). The FDIC does not insure investment accounts that buy and sell stocks, bonds, mutual funds or other securities.
Single checking and savings accounts are insured up to a maximum of $250,000. This amount is temporary and will expire on the last day of 2013. It will then return to its prerecession limit of $100,000 per account. The only exception to this is individual retirement accounts, or IRAs, which are tax-advantaged savings accounts that will remain protected up to the amount of $250,000.
Extending Insured Amount
To protect a larger amount against possible bank failure, it is advisable to open more than one bank account. The FDIC insurance limit applies to each individual holding deposits in a single institution. Opening accounts in separate banks spreads the risk.
Purchase and Assumption
When a bank is deemed to have failed, FDIC officials enter the bank after the close of business on Friday to inform management and employees. There is no public notice until after the bank is seized. In the most common type of FDIC action, when a bank's capital-to-asset (loan) ratio falls below a certain limit, the FDIC transfers its liabilities (deposits) and some or all of its assets (loans) to another bank. The assets, in the form of outstanding loans, may be auctioned off to several institutions. The seized bank then opens its doors--usually on the next business day--under a new name and new ownership.
The FDIC can also seize a failed bank, liquidate its remaining assets as a receiver and pay insured depositors from the proceeds. Any deposit amounts not covered by the bank's liquidation are paid out of the FDIC's own funds, which are provided by the U.S. Treasury by an appropriation of the U.S. Congress. In this case, the bank is permanently closed, its stock canceled and its physical assets sold at auction.