When a bank fails, it brings along with it a rush of anxiety for its customers. What happens to your money, and where do you go next?

Though bank failures have been less common in recent years, 2023 has seen a few dominate the news cycle. Silicon Valley Bank (SVB), Signature Bank and First Republic Bank all went down within two months of each other, causing thousands of Americans to question what would happen to their funds.

The good news is as long as your banking institution is insured by the FDIC (Federal Deposit Insurance Corporation), your money should be safe. The government agency’s primary purpose is insuring your money in case of bank failure.

Can a Bank Lose Your Money?

Technically speaking, yes. Most banks don’t actually keep customers’ entire deposits on hand. The Federal Reserve typically only requires institutions to keep about 10% of deposits on hand in the form of cash, although that number can be reduced to 0% during a recession or crisis. This happened in 2020 during the Covid-19 pandemic, and a reserve requirement has still not been reinstituted.

Any deposits not in reserve are usually lent to other customers in the form of loans and credit cards so the bank can earn money on them. Because of this, it is possible for a bank to lose your money. When an institution is no longer able to provide enough liquidity for its depositors and creditors, the FDIC takes action to close the bank.

However, most reputable banking institutions protect customer funds against this circumstance through the FDIC. FDIC-insured accounts typically cover up to $250,000 per depositor for each account ownership type and institution.

What Happens if a Bank Fails?

When a bank can no longer meet the demands of its depositors and other creditors, the FDIC takes action to close the institution. Typically, this involves arranging the sale of the failed bank’s accounts to a healthy institution. When that happens, customers have access to their funds immediately with the new bank.

For instance, when First Republic Bank failed in May of 2023, deposits were sold to JPMorgan Chase. All previous First Republic accounts were automatically converted to Chase accounts.

If your financial institution is sold to a new bank, the new bank will contact you with account information and answer any questions about your debit cards, checks or pending payments—which are all typically still functioning for a brief period after the original bank failure.

In less common cases, the FDIC will pay off the failed bank’s depositors up to the insured amount—$250,000 per account ownership type. If you have more than that amount with the institution, the failed bank’s estate is responsible for the remainder. In that case, you might have to file a claim to get the rest of your money.

In this case, pending payments and checks will no longer be processed, as they will reflect that the bank is closed. This won’t affect your credit score, but you will need to ensure any outstanding payments are taken care of using another source of funds.

This process is only relevant for banks. Credit unions follow a similar approach but are usually insured by the NCUA (National Credit Union Administration) instead of the FDIC.

What Happens to Your Money if a Bank Closes?

If a bank closes, what happens to your money depends on whether the account is sold to another institution or the FDIC takes responsibility for paying out depositors.

In most cases, accounts are sold to another bank, and you will automatically have access to your funds at the new institution. Funds should be available immediately.

In the case of FDIC payments, the agency aims to pay out customers as soon as possible after their bank failure. That is typically around two business days.

If your deposit at the closed bank was in the name of a trust or through a fiduciary, it might take longer to get your funds. This is because you’ll likely be required to provide documentation proving ownership or wait for the money to pass through the fiduciary.

How To Keep Your Money Safe From Bank Failures

The most important step you can take to protect your deposits is to ensure your institution is FDIC-insured. You can use the FDIC website to search institutions and find one that works for you.

It’s also a good idea to keep an eye on the status of your bank and monitor news trends, especially during a recession. If you’re worried about bank failure, you might consider transferring your funds to another institution. Additionally, if you have more than the insured limit in a single account—$250,000—consider alternative ways to insure your excess funds.