What to do when banks fail?

The evening news across the world, reports of the falling stock markets, foreclosures and failing banks. For many, living in such trying times was only an empathetic story they absorbed from grandparents who lived through the ‘Great Depression’, never envisioning themselves in what is now deemed a global recession. For many consumers, there is a sense of pride in depositing a much anticipated paycheck into the bank of their choice at the end of their pay cycle, however now we must ask, what do you do when you can’t bank on the bank?

A bank failure is the closing of a bank by a federal or state banking regulatory agency. Generally, a bank is closed when it is unable to meet its obligations to depositors and others. In the event of a bank failure, the FDIC (Federal Deposit Insurance Corporation) acts in two capacities: 1.) As the insure of the bank’s deposits, the FDIC pays insurance to the depositors up to the insurance limit; and 2.) the FDIC as the receiver of the failed bank, assumes the task of selling/collecting the assets of the failed bank and settling its debts, including claims for deposits in excess of the insured limit. In the UK, the basic insurance amount is 250,000 pounds per depositor, per insured bank.

So does this mean that the average bank customer, who may not have deposits matching the insured amount, need worry? Some may say we all should worry, as more and more lending institutions are seeking their own ‘bail out’ of the biggest finical challenge of this generation.

So while your bank still has money and can process your checks, it may be time to pay down debts, pay quarterly taxes and mortgage payments in advance (if that is feasible for your family) and begin thinking about having money outside of banks (foreign currencies), etc., before your money is inaccessible or even non-existent.

Now keep in mind, not all investments outside of banks are immune from this turmoil. As for your checking and savings accounts, recognize that you may have several different accounts in the same bank, but FDIC only insures individuals, not each account.

So if in fact you see the signs of a failing bank, it may be time to perhaps adopt some of the old teachings of our grandparents and great-grandparents. Some people may panic and begin stuffing money under the mattress’ or go and close all of their accounts. Others may be fortunate enough to have a substantial savings, and simply wait out the tough times. In either situation, educated yourself on the current financial conditions and try to spread your savings across several lending institutions.

Keep yourself informed and that’s something a responsible borrower can bank on.

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