Has anyone lost money from a US bank failure since FDIC?

According to the FDIC “Since the start of FDIC insurance on January 1, 1934, no depositor has lost a single cent of insured funds as a result of a failure.” (Bolding mine)

That only covers insured funds.

From what I understand, when a bank fails, the FDIC swoops in, works a bunch of magic and in a short time another bank is handling the failed bank’s accounts and everything is OK. In other words, even non-insured funds do not necessarily vaporize.

Or do they? Is that that common? When was the last time that non-insured funds were never recovered?

https://en.wikipedia.org/wiki/NetBank

Folly, great find.

I had looked to see what happened with Washington Mutual (largest bank failure in US history). From FDIC: “WaMu’s balance sheet and the payment paid by JPMorgan Chase allowed a transaction in which neither the uninsured depositors nor the insurance fund absorbed any losses.”

Here is a case where a bank in Iowa failed being uninsured due to a quirk in Iowa law. It happened in 1983 when there was a big farm crisis:
https://www.nytimes.com/1983/09/16/business/bank-s-failure-dazes-a-town.html

The Exchange Bank was not FDIC-insured, though.

in 1983 in Knoxville TN people had money in what they thought was a bank but it was not so it had no FDIC insurance. Many Knoxville banks went under that were covered by FDIC. a lot of the people did prison time for bank fraud. One guy did 7 years. My bank went under and reopened the next day with a new owner. The FDIC sent me a letter as did the new bank telling me my money was safe. I had around $300 in the bank.

I assume a bank failure is like any other bankruptcy - insured amounts are OK, but uninsured may receive nothing or pennies on the dollar. A bank has a portfolio of assets (mortgages, outstanding loans, etc.) that are saleable. They may simply not cover the total obligations. IIRC, the “magic” that the FDIC usually works is - “you guys at bank #2 take over this bank, and we’ll make up the difference so it’s a break-even proposition.” Usually that’s cheaper and a lot simpler than paying off all the FDIC insurance and then auctioning off thousands of debt obligations…

when my bank went under in Knoxville you could still use checks from the old bankrupt bank. If you wanted the new bank would give you new checks but many people used the old checks until they ran out. People joked that the old checks were bogus but they were legal and OK.

Just a note about Netbank. The FDIC calls payments made to uninsured depositors from the disposition of the assets of a failed bank “dividends.”

Even though Netbank closed in 2007, the FDIC is still (as of 2018) making dividend payments to uninsured depositors. (Insured depositors lost no money.) As of 3/22/2018, the FDIC has repaid 93% of the uninsured deposits.

Thanks for the replies. Only one example so far, so it sound pretty rare.

The other kind of example of a loss is as follows:

Not long ago I bought a 4% 5 yr CD from a credit union (which means insurance by NCUA but that’s virtually the same as FDIC). The next best deal was IIRC 3.00. Even now the best deal is only 3.30%. Sometimes if you look out for it various bank/CU’s will offer outstanding deals like that. But say the CU goes bust and NCUA liquidates it. I’ll get my principal back (below the limit) but not a 4% deal somewhere else. I’ll have to buy another CD at a lower rate. That’s a loss even if not in the same legalistic sense of a principal loss. This would be even more true if market rates had generally gone down since I bought the CD (in the event they’ve generally gone up, it’s just that nobody is offering a deal that good relative to market right now).

This is arguably minor, but I’ve seen somewhat informed people on personal finance sites argue that this is a reason they don’t like medium term CD’s and prefer treasuries. I personally think that’s ridiculous for the example I gave at least: the 5 yr treasury was yielding 2.68% when I bought the 4% 5 yr CD, no way does the chance of that credit union going bust and being liquidated* worth anywhere near that difference, a few 0.01%'s at most is probably a more reasonable estimate of that risk. But it is something.

*as other responses mentioned, a lot of times FDIC/NCUA will subsidize a takeover of an insolvent institution by a healthy institution as less costly to them than liquidating the sick institution, auctioning off all the assets, and paying off all the under-the-limit deposits. In that case your account, whatever it is and whatever amount, just carries on in the name of the merged institution.

As an incidental point, this is the problem with insurance. This credit union was offering this high rate because it’s unable to borrow in the (uninsured) market at a better rate, because it’s in poor shape. Yet it pays the same for the insurance as a better institution; and with the insurance you have no incentive to do any due diligence on the credit risk.

I think they should drop the insurance cap back down a much lower figure, just sufficient to protect the business/checking accounts of small business and individuals. If you have $250k to invest, you should be doing your homework on credit risk and allocating capital accordingly.

Under current law, the FDIC is required to use the least cost approach to a bank resolution. In most cases, the least cost approach is a purchase and assumption transaction, which is what the OP describes. Under this approach, a different, healthier bank assumes responsibility for all of the failed bank’s deposit obligations (and, sometimes, its other obligations too). Although the FDIC is obligated to use purchase and assumption transactions when they are the least cost approach, these transactions are also appealing because depositors are covered in full and have uninterrupted access to their funds, and because harm to the community is minimal.

In some cases, however, a purchase and assumption transaction is not the least cost approach. In these cases, the FDIC usually acts as receiver for the failed institution. Depositors receive the insured portion of their deposits fairly quickly, usually within a few days. With respect to the uninsured portion of their deposits, depositors are unsecured general creditors of the bank, and thus junior to all secured creditors. It would not be unusual for there to be a payoff of a few cents on the dollar for uninsured deposits.

In the period from 2008 to 2013, there were 489 bank failures resolved by the FDIC, of which 26 did not involve purchase and assumption transactions. So depositor losses in an FDIC resolution are unusual, but by no means unheard-of.

That’s a drawback to deposit insurance in theory generally and can be in practice, but the market for CD’s is a funny thing. I often see people try to explain it in terms of risk and reward, but it really doesn’t work that way at the extremes of the best CD deals. Often they are simply good deals.

They are the product of a price insensitive retail market (you have to really raise a rate to get a lot of retail attention, in the professional market if you raise your rate 5 bps and your credit is the same everyone will flock to you), and to some degree lack of strong profit motive on the part of some institutions, particularly credit unions.

The CU I bought that CD from is in fine shape per its reports to NCUA. They just offered a super rate, for like a week. I got my application in on the last day. But again although rates on insured CD’s are not a good indicator of credit quality…actually because of deposit insurance… if you do get a good rate, or even an OK rate but market rates go down, then the institution fails and you get your principal back, you’ll have to reinvest it a lower rate*. Multiply that by the probability of default of an ostensibly sound institution and it’s not a big deal, but it’s a little bit.

*a somewhat asymmetric risk because if rates go up a lot and the institution doesn’t fail, you can still withdraw the CD early with an interest penalty of usually 6mo-1 yr and reinvest somewhere else for more. That put option is worth a significant amount (maybe 25bps or more depending) which you don’t get with a treasury (or brokered CD’s usually but you usually do with direct ones). Whereas again the probability weighted loss of your good deal contingent on the institution going bust is more like a few bp. But if you consider the upside of the put option, you also have to note the downside of losing your good rate, though not your principal, if the institution goes bust.

Thanks for the great reply jbaker! That was exactly what I was looking for.