In recent years, bank failures have become rare. Prior to Silicon Valley Bank and Signature Bank failing earlier this month, the last time the Federal Deposit Insurance Corp. (FDIC) took over a financial institution was in October 2020.
But the failures of Silicon Valley Bank and Signature Bank are a reminder of the banking system’s vulnerability. After all, they were, respectively, the second and third largest bank failures in U.S. history.
The largest one happened when the FDIC seized control of Washington Mutual Bank in September 2008. That year, 25 banks failed. The FDIC would go on to seize almost 300 banks in the ensuing two years, as the Great Recession hit financial institutions across the country. For comparison, in the five years prior to 2008, only 10 banks failed.
In 2009, 60 Minutes correspondent Scott Pelley followed an FDIC team to report on what happens when a bank is taken over. 60 Minutes viewers saw firsthand the lengths the federal government will go to protect bank depositors.
WHAT IS THE FDIC
The FDIC was established by the Banking Act of 1933 during the Great Depression. That year, approximately 4,000 commercial banks failed, and the legislation was intended to restore Americans’ trust in the banking system. Prior to the FDIC, deposits were not insured. Between 1929 to 1933, depositors lost about $1.3 billion when their banks failed.
Today, FDIC insures depositors’ money up to $250,000 per depositor for each account ownership category if the bank is a member of the FDIC. That means depositors who have less than $250,000 in a failed bank will not lose any money when the FDIC takes over, and it is possible to have deposits of more than $250,000 at one insured bank and still be fully insured.
“Nobody’s ever lost a penny of insured deposits…” then-FDIC Chairperson Sheila Bair told Scott Pelley in 2009, “which is why you need to make sure you are below the insured deposit limit.”
WHERE THE INSURED MONEY COMES FROM
That guaranteed $250,000 does not come from taxpayers, nor is it financed from the federal budget. Instead, it is paid for through a Deposit Insurance Fund (DIF). The FDIC assesses premiums on each of its insured banks, and a bank’s assessment rate is determined and paid each quarter. The DIF is invested in Treasury securities, so it also earns interest.
When Pelley spoke with Bair in 2009, she said the FDIC was, at the time, projected to spend $65 billion on bank closings through 2014.
But no matter how much the FDIC ultimately spends to restore depositors’ money, it is designed to always have access to more. Should the FDIC pay out all the money in the DIF, it can take out a direct line of credit through the Treasury Department up to $100 billion. During the Great Recession, Congress temporarily increased the FDIC’s borrowing limit to $500 billion.
“We don’t go broke,” Bair told Pelley in 2009. “We are backed by the full faith and credit of the United States government.”
WHAT HAPPENS WHEN THE FDIC TAKES OVER
As 60 Minutes reported in 2009, there are three ways the FDIC can take over a bank: It can close it and pay off depositors; run the bank itself; or try to find a buyer.
If the FDIC closes a bank, the FDIC notifies customers and sends checks for the amount of the insured deposits, or it moves the deposits to another FDIC-insured bank.
When the FDIC takes over operations, it restores account access by setting up a “bridge bank.” A bridge bank, which operates under an FDIC-appointed board, is intended to “bridge” the time between a bank failure and when the FDIC can find a more stable resolution.
As Pelley witnessed in 2009 when the FDIC seized the Heritage Community Bank outside Chicago, the FDIC brings in a large team of people, including accountants, asset specialists who concentrate on loans, and investigators who examine the reasons the bank failed. After a seizure, the bank’s employees work for the FDIC.
The customer experience does not change much. Depositors are still able to retrieve their money, usually up to the insured amount, including by writing checks, accessing their safe deposit boxes, and withdrawing money through an ATM.
If another financial institution buys the seized bank, the buyer receives all the bank’s deposits, customers, and loans. The FDIC, then, does not have to pay depositors at all—even accounts over the insurance limit are generally safe.