What happens when a bank fails?

KL writes:

IndyMac always had the best rates on Bankrate and now they have gone under. If I had placed my money with them, would I get it back? How long would it take?

This is a great question. IndyMac was seized by federal regulators late Friday afternoon and the bank will now be run by the Federal Deposit Insurance Corporation (FDIC). Things are expected to be "business as usual" when the bank re-opens on Monday morning. The FDIC had to step in and take over the bank because of what is commonly known as a "run on the bank". In the past 11 days, depositors have withdrawn $1.3B in deposits. Making good on these withdrawals forced the bank into a liquidity crisis.

If you had money deposited at this bank and you were under the FDIC insurance limits (generally $100,000, but more on that later) you would not have experienced any loss at all. The worst that would have happened is that you might not have been able to access your money for a day or so while the bank was being taken over by the FDIC. In the case of IndyMac, though, customers were able to access their money over the weekend via ATMs.

However, not all IndyMac depositors will be made whole. As I mentioned, the FDIC insures deposits at banks, but only up to certain limits. It now looks like those IndyMac customers who had deposits over the FDIC insurance limits will get payment equal to only half of the uninsured amount. Obviously, it is very important to understand the FDIC insurance limits. Here is a quick primer:

Generally speaking, the FDIC insures $100,000 per depositor per insured bank. You will always be fully covered if the total of all your individual accounts is less than $100,000.

Different limits apply to certain retirement accounts like IRAs, Roth IRAs, SIMPLE IRAs, SEP-IRAs, and Section 457 deferred compensation plans. These accounts are insured up to $250,000 per depositor per insured bank.

If your account is a joint account and both owners have equal withdrawal rights, then each person's share of the joint account is insured up to $100,000. So, a wife would be entitled to $100,000 in coverage and the husband would also be entitled to $100,000 in coverage. Together, $200,000 would be protected.

In summary, it is possible to qualify for much more than $100,000 in FDIC coverage at a single bank, but you need to be very careful about how the accounts are titled. For more information, check out the FDIC's website. Also, to check that your bank is covered by FDIC insurance, you can call 1-877-275-3342.