I have a checking account at WAMU, so I’m worried about the news that it may be failing. I know the FDIC insures all of my money (I’m nowhere near the limit), but if the bank did fail, how would that work in real life? Would my money be unavailable while I went through the paperwork?
I also have a credit card through WAMU. What would happen regarding my credit card debt and interest rate if they were to fail?
Read When a Bank Fails - Facts for Depositors, Creditors, and Borrowers from the FDIC.
The FDIC’s Resolutions Handbook is at http://www.fdic.gov/bank/historical/reshandbook/. Basically, in most cases your account is taken over by another bank, either in a purchase and assumption transaction or in an insured deposit transfer. In either case, you have a new bank. In a small number of cases (< 10%), the FDIC just does a straight deposit payoff. In these cases, you receive a check for the amount of your deposit, plus any applicable interest (as long as the deposit plus interest are within the insurance limit). The FDIC describes this process as a quick one; I’ve heard it can take quite a while, but that may be considerably out of date. Any outstanding checks you have written bounce, because there is no bank to honor them. These checks are stamped “Bank Closed,” not “Insufficient Funds,” so it theoretically shouldn’t affect your credit, but I suspect it can be a real inconvenience.
As to your credit card, if there is a purchase and assumption transaction it will just get taken over by the new bank. That’s probably what happens in an insured deposit transfer too, but that will depend on whether the new bank wants these receivables or not. If there is a straight deposit payoff, the FDIC will cancel the card and seek to recover any outstanding amount in its capacity as receiver of the failed bank.
Some slightly out of date firsthand experience here: I contracted on several jobs with the Resolution Trust Corporation in shutting down savings-and-loans in the early 90s, so procedures may have changed.
If there is to be a payout, rather than another bank taking over the failing bank’s deposits and assets, we spent the weekend (the closing always happened Friday afternoon) running reports and trying to narrow down what accounts were really at risk of being over the 100,000 limit. Not always straightforward with joint accounts etc. Those who were found for sure to be under the limit - usually determined by some time Saturday - had checks cut that weekend, which were mailed out on Monday. The ones which appeared to be over the limit, IIRC, got checks for 100,000. I believe sometimes those recipients got more money down the line if their accounts, upon further review, did not hit the limit or there was money left over once all the other liabilities were settled.
You could simply deposit that check at another institution. Of course there was that 24 hours or so between the time it was mailed, and the time you got it and could take it to another bank. I believe outstanding checks drawn on your account were not honored but I could be mistaken. The interesting thing was bank checks (cashier’s checks, certified checks) - any such checks which were outstanding were treated as part of your account. So if the day before the bank closed, you got a cashier’s check for 20,000 (bringing your account down from 120K to 100K), but you had not cashed it… well, you were out that 20,000.
If the institution went P&A (Purchase and Assumption), your account remained. At some point it was officially owned by the new bank. I was not involved in that part (I was involved in the payout group) so I can’t comment on the logistics of outstanding checks, new checks written on the old bank’s account, etc. We loved P&As as payouts could be pretty hellish.
Yeah - the payout is quick for most depositors. It can get complicated if a single account has over 100,000, or a person has a bunch of joint accounts, or there are multiple accounts at the same or similar address (we did one closing of a bank that catered to the Chinese population in SF - is the J. Chin at 123 Any Street the same as the James Chin at 123-A Any Street?)… and I think IRAs are treated separately from main deposits; those situations all require manual review but even in those cases, it’s usually sorted out that weekend. Some complex cases do take longer. One particularly painful situation is if the bank has a lot of brokerage deposits (e.g. Merrill Lynch takes in money from a bunch of people, pools it, and deposits it in a bank CD). We had something like 3 billion dollars worth of those accounts in the one big closing I did. The bank has no idea of the individual depositors… but they have to find out, because your money deposited through Merrill Lynch counts toward your 100,000 limit.
Back in the early 90s, the brokerage customers typically didn’t even know where their money was being invested, so they couldn’t manage their money within the limits. I’ve placed money in CDs through Fidelity in the past and I always knew where it was going, possibly the sort of product that cause so much pain in the early 90s doesn’t even exist any more.
Anyway - even with the brokerage monies, we had the vast majority of people paid off within a month.