Insured banks are those whose deposit accounts are insured up to $250,000 by the Federal Deposit Insurance Corporation (FDIC), an independent federal agency. When an insured bank fails, the FDIC becomes the receiver (i.e., the entity appointed to protect the bank’s accounts and other property while it manages the orderly liquidation of the failed bank). This liquidation process entails more than converting assets to cash. It also involves finding new ownership for the failed bank.
Closing the Failed Bank
As soon as possible after the FDIC officially deems that a bank has failed (i.e., that it is unable to meet its credit obligations), it notifies customers and the public that it has assumed the responsibilities of receiver. It closes the doors to the public and immediately starts working with the bank’s staff to bring the books of account up to date and ultimately to post all relevant entries to the bank’s general ledger.
Resolution of Claims
The next major step is to request that the failed bank’s creditors (including uninsured depositors) submit claims to the FDIC. This notification includes publishing notices in newspapers and mailing notices to individual creditors. After reviewing claims over a period of 180 days, the FDIC pays the allowable claims of creditors. Owners of uninsured accounts are paid to the extent possible after payment of the bank's legitimate expenses.
Repudiation of Contracts
The FDIC has the power to refuse to honor contractual obligations of the failed bank if honoring those obligations would be burdensome during the period of receivership. The more the FDIC can place the business of the bank on hold during this period, the easier it is for the FDIC to wind up the bank's business.
Freezing of Litigation
The FDIC has the authority to place litigation against the failed bank on hold by requesting “stays” from the courts. Courts cannot decline such requests. The FDIC can remove any cases in state courts to federal courts.
Settlement With Assuming Bank
When another bank agrees to assume the assets and liabilities of the failed bank and to absorb its business into its own, the FDIC proceeds to settle with the assuming bank. This bank may be an existing one in the same market area or an organization that was formed for the sole purpose of assuming the business of the failed bank. Settlement, or final accounting adjustments, may take place at a time between 180 days and 360 days after the bank’s failure date.
Termination of Receivership
When all eligible claims have been paid and a final disposition of assets has taken place, the FDIC moves to terminate the receivership. Some receiverships last longer than others, depending on the complexity of the issues, the existence of litigation, the nature of the assets involved and other factors. The FDIC’s receivership continues until all significant issues have been resolved.
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