Bank Failure and Your Money: What to do.
Bank Failure and Your Money: What to do.
Banks DO run out of equity capital, and they cannot just “create money” no matter what the conspiracy crowd says.
There are two main ways a bank could go bust.
Mass amounts of people would need to either default on their loans or pull their money out of the bank.
When that happens, the FDIC steps in and asks state banking regulators to close the institution and appoint the FDIC conservator.
Bank failures may result from:
A bad economic downturn driving loan or investment losses, or
Poor lending practices resulting in loan losses, or
Badly designed borrowing/ funding or excessive spending resulting in operating losses (Costs exceed income), or
Over-leveraging (resulting in cash shortfalls and an inability to pay bills even if lending is solid), or
Several or all these together.
These types of events all directly deplete bank capital.
We cannot yet eliminate the economic cycle, but we can regulate higher required capital levels and certain lending and underwriting practices. These types of regulation reduce bank frequency of failure in bad markets and good.
More typically, the government is therefore incentivized to have your failing bank taken over by a more successful one, also ensuring you are not personally at risk.
What happens with your money in case of a Bank Failure? Bank Failure and Your Money: What to do.
In the rare instance of bank failure, the FDIC guarantees you will be returned your cash *up to* $250,000.
And that is $250,000 for each type of account you hold.
However, there is a limit. $250,000 per insured, per FDIC-insured bank, per ownership category.
If you have over that in an account, and the bank goes under, then you’ve got problems.
What happens to investors when a bank fails?
The FDIC is essentially an insurance company. No insurance company has “enough”, in the sense that they could cover every single policyholder making a maximum claim.
Suppose that every single insured automobile in America crashed simultaneously. The nation’s insurance companies would be wiped out, and very few people would be paid on any claim. Is this a great scandal? No. Because the probability of this happening is so incredibly remote as to be not worth discussing.
Similarly, the FDIC cannot guarantee absolute mathematically certain safety against a rogue asteroid striking the banking system.
But oddly, some people think this means that the system is fundamentally unsound, and you should buy their overpriced bullion coins.
Other answers point out that no insured depositor has ever lost money. Let me make this even more interesting: When Washington Mutual lost $17 billion in a 9-day banking run, federal regulators had the bank sold and running again the following week, with not a single cent of their reserve used.
If things ever got to the point that the FDIC depleted their reserves, we would have other things to worry about than our retirement savings.
How FDIC acts in a Failure Bank?
The FDIC doesn’t wait for banks to fail either.
They constantly perform what’s called a “stress test” on a bank’s liquidity – it’s the ability to pay its own debt and depositors.
When a bank starts getting short on capital, the FDIC doesn’t wait for a “run on deposits” or “receivership”. They put together a team well in advance, auction off the bank to a larger bank in a secret option then, at 5 p.m.
Friday, hit all the branches of the bank simultaneously and take over.
They all even stay at different hotels, so no one knows what’s going on.
The reason why the FDIC doesn’t wait is that they know a bank run will kill a healthy bank as quickly as a sick one. It’s their job to keep up confidence in the banking system.
How much Money does FDIC have?
FDIC may not have the exact amount of money on hand they would need to cover all deposits.
That would be sort of pointless.
They rather predict the probability of failure and carry an appropriate amount on hand.
Deposit-taking institutions are audited and regulated so that your scenario should not occur.
Not even the banks have enough money to cover all deposits on demand.
How much banks should carry is what Basel banking regulations are about.
The FDIC does have the massive drawing power of the United States government though.
However, if all deposit-taking institutions fail that means that the entire economy would have collapsed.
People would probably have to resort to a barter economy.
Your question is sort of like asking do insurance companies could cover all home insurance claims if all houses in the country burn down. If all houses in the United States burn down, there will be bigger issues than that.
Risks to our society when Banks Failure
Banks have a license to create money out of nothing through the principle of fractional reserve banking. In exchange, they get a commitment from somebody to repay that money, plus interest, with their hard labor.
This system basically resembles a house of cards and failure, at some point, is inevitable.
When that happens it usually hits the poorest first and hardest.
Through debt, people can be enslaved.
When they fail to make the payments on their homes the bank is at risk of failure, but they still have the legal right to seize property.
When banks fail there isn’t enough money to go around, threatening our entire economy to collapse.
How to Invest in a Recession?
The general answer for almost everyone is to pick a long-term strategy you can stick with through good times and bad, and avoid the trouble, expense, and error of trying to guess the state of things and what to do about it.
If you knew in advance that a recession was coming, and the market had not yet priced it in, then of course you could make money. But I assume that’s not your question. I think you’re asking what to do when the recession is already here, and everyone knows it.
Most investors act the opposite of sense. They cut back on risk, sell assets that have fallen in price, and buy assets that are still expensive. Then when the good times return, they reverse the process—always buying high and selling low. While you would do better, in theory, to do the opposite, for most retail investors it’s best to ignore the ups and downs, keeping eyes on the long-term horizon that never changes much.
However, if you discover in a recession that some previous assumptions you made were wrong—say that you wouldn’t need your investment funds for many years (but you just lost your job and have to liquidate long-term investments for mortgage payments and food) or that the stock market would never decline more than 5% or stay low for more than a year (but it did both those things)—then you have to make changes.
Do not to over-react. Tweak your old plan, don’t throw it out, and create a new plan based on recession assumptions that you will toss out as soon as good times return.
Mintco Financial Planning in Florida – Retirement Planning in Florida
The current market downturn is especially stressful for retirees who have their retirement funds allocated in stocks and bonds.
Wild swings in the stock market could lead many investors to make major changes to their portfolios.
If you are like many other investors, there is a good chance that you have thought about substantially drawing down on your investments as retirement approaches.
You may already be in retirement and find yourself highly anxious about whether you will have enough funds to pay for your various pursuits during your golden years.
This reactionary mentality of withdrawing large amounts of cash from your investments, an action that is typically driven by fear and uncertainty, can lead to poor decision-making that could have serious consequences for the health and long-term viability of your portfolio.
Remember, sound financial planning accounts for market cycles such as these. Reason, not emotion, should guide our decision-making.
Contact us to review your financial options.
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