what happens to your money when a bank fails?
August 6, 2008
The (FDIC) shut down Arizona’s largest Arizona’s based bank.
Based out of Scottsdale, First National Bank of Arizona , (the self-described” home of the Alt-A mortgage“), a specialist in lower quality mortgages was taken over by Mutual of Omaha.
A link from the First AZ web site immediately forwards to the Mutual of Omaha site read like a tombstone describing the takeover by the FDIC.
Experts have claimed that more bank failures are imminent before we see any recovery in Banking and the financial sector; thus, a need precursor to a recovery in lending and finally real estate.
Is Your Bank Healthy?
One way to find out is through the free “Safe & Sound” bank rating feature at www.bankrate.com :
“Bankrate.com’s Safe & Sound® service is a system designed to provide information on the relative financial strength and stability of U.S. banks”
Although, many people read about bank failures (there have been 8 so far this year), fortunately, there are few who actually experience them firsthand.
I hope it never happens to you. However, if you are curious what transpires, please read
what happens when a bank fails?
In most cases. the FDIC swoops in an seizes the banks assets and operations on a Friday after business hours. In the majority of bank failures the FDIC acts as a ‘broker’ and has arranged for a healthy bank to purchase the assets and reopen the bank on Monday morning business as usual.
As in the situation of First National Bank of Arizona the bank may be closed during the weekend during the transition, customers typically have access to their insured monies. On Monday, depositors will likely have access to the rest of their money up and beyond insured amounts.
The scenario far more frightening is
what happens when the FDIC has not located a healthy bank to buy the failed bank?
- ATM and debit cards will be deactivated .
- Checks not already clearing the system will not clear. They will be returned stamped “bank closed”.
- FDIC mails checks depositors for their insured amounts and will depositors
- Deposits that exceed insured limits will be paid pro-rata when the FDIC sells the assets of the failed bank
Both scenarios are emotionally (and financially) taxing. However, can failed banks be good for Real Estate?
Ultimately, after a lot of pain, I believe the answer is ‘Yes’ ! Here’s why.
Smaller local banks offer higher interest on savings accounts, CD’s and even checking accounts. That is how they get depositors to put money in a less established bank than the majors like Wells Fargo, Chase and Bank America.
In order to pay higher interest rates, these banks need to earn higher rates of return on their money (your deposits).
The primary way banks have achieved higher rates of return is on more risky loans to borrowers. In order to compete, the bigger banks, who traditionally are more conservative, started offering higher risk loans.
We all know what happened next.
When real estate prices stalled. The banks were left holding loans that were secured by real estate with less value than the loans. In a sense, unsecured loans.
Big banks had to write down major losses. Greatly effecting share holder value. Further, devastating stock prices. Making it more expensive to borrow money.
Smaller banks started to fail as they had no access to Wall Street capital.
What has risen from the smoke is Housing Stimulus Legislation that will regulate the industry to hopefully prevent this scenario from ever happening again.
The government has opened up liquidity to Fannie Mae and Freddie Mac so banks can start lending to buyers. Now, thankfully, the levels of scrutiny in underwriting are at levels that borrowers can truly afford to take a loan will be approved.
The desired outcome is less of a financial industry reliant on high levels of risky debt. The key factors that contributed to the sub-prime debacle and the housing crisis we are experienced.
I am optimistic that the outcome of these failures will be a strong economy and real estate market that will endure and stand the test of time.
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Copyright © 2008 By James Wexler, All Rights Reserved. *what happens to your money when a bank fails?*
Contact James Wexler (480) 221-8080 for all your Phoenix | Scottsdale area Real Estate needs
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Thanks for the info. makes you wonder why anyone keeps money in smaller banks. or at least in amounts over $100K per bank acct.