Bank Fail! Is Your Money Safe?

Until last week, the expression, “money in the bank” was considered the ultimate in security. But after the WaMu firesale, many are getting a little worried that their own bank might fail.

So how can you make sure you are protected?

Before you pull out all of the money you have in the bank and stuff it under your mattress, know that the money in your accounts (not just savings and checking but also investment accounts and IRAs) is protected by federal insurance. But there are limits. Depending on how much money you have and where you keep it, you may or may not be fully covered. The best thing you can do, as with so many matters related to personal finance, is to educate yourself. Knowing what is protected and what isn’t will help you determine what to do with your money.

Even if your own bank suffers the unfortunate fate of WaMu (and even if you bank with WaMu) you probably don’t have anything to worry about. In most cases, as in this one, when one bank fails, its accounts are acquired by another bank.

At WaMu it is still business as usual. The quirky WaMu brand may be disappearing but your money won’t be. When a bank takeover like the one last week occurs, the law mandates a speedy transition with no downtime in being able to access your accounts. Even if the bank is physically closed, customers usually have access to their money by check, debit card or ATM. In most cases, a bank closed on a Friday will be open on a Monday. In those rare cases when a buyer can’t be found right away, ATM and debit cards will stop working and checks that haven’t cleared the system will be returned. There may be some delay in receiving your insurance checks and you’ll have to do the work of contacting each merchant to make other payment arrangements. But the good news is you won’t lose your money.

Know the facts

The Federal Deposit Insurance Corporation (FDIC), an independent agency of the federal government, was specifically created as a means of shoring up the US economy in response to the thousands of bank failures that occurred in the 1920s and early 1930s.

The FDIC insures all bank deposits (checking accounts, savings accounts, certificates of deposit, and money market accounts) up to $100,000 per account per owner of that account. This means that, in the case of a joint account, each co-owner is insured up to $100,000. Not covered are stocks, bonds, mutual funds, or money market funds (as distinct from money market accounts).

Most banks are FDIC insured (and you can find out if yours is by checking with the Bank Find tool on the FDIC’s web site).

The FDIC provides separate coverage for certain kinds of retirement accounts such as individual retirement accounts (IRAs), and Keoghs, insured up to $250,000. Note that this is in addition to the $100,000 per account for bank accounts. Living or revocable trusts are protected up to $100,000 for each beneficiary.

Use the FDIC’s Electronic Insurance Estimator to find out how much coverage you have.

Maximize coverage

Remember that insurance is provided on a per owner basis. A married couple can have as many as three accounts, two individual and one joint account to increase coverage for your family up to $400,000.

One sure way to increase your coverage is to open multiple bank accounts with different banks. FDIC insurance is provided on a per bank basis and there is no limit on the number of banks you can open accounts with. Use Bankrate’s Safe & Sound rating system to determine how stable a particular bank is.

Even if you have more money than what is covered by insurance, all is not lost. You become a creditor of the failed bank’s receivership and you’ll be first in line to receive payments when the FDIC sells the assets of the failed bank. The FDIC says that uninsured depositors typically receive anything from 40 cents on the dollar to 100 cents on the dollar with an average of 72 cents on the dollar.