What Happens When a Bank Fails?
1. Regulatory Intervention: When a bank is at risk of failing, regulatory agencies such as the Federal Deposit Insurance Corporation (FDIC) in the United States closely monitor its financial condition. If necessary, regulatory authorities may intervene to address the bank’s problems and prevent further deterioration.
2. Appointment of a Receiver: If a bank is unable to meet its financial obligations and is deemed insolvent, regulatory authorities may appoint a receiver to take control of the bank’s assets and liabilities. The receiver may be the FDIC or another designated entity responsible for managing the bank’s affairs.
3. Deposit Insurance Coverage: Deposits held in the failed bank are protected by deposit insurance, up to the coverage limit provided by the FDIC or another applicable deposit insurance agency. The FDIC typically reimburses depositors for their insured deposits promptly, usually within a few days after the bank’s failure.
4. Sale or Resolution: The receiver may seek to sell the failed bank’s assets and liabilities to another financial institution. Alternatively, the receiver may opt to liquidate the bank’s assets and wind down its operations in an orderly manner. The goal is to minimize disruptions to depositors and creditors and maximize the recovery of funds.