What Happens if the Bank Fails? Essay Example

deal with this situation, Bridge Bank temporarily manages banks until a permanent solution is found.

When a bank experiences failure, the FDIC takes various actions to address the issue. Initially, a failing bank letter is sent to notify the institution and an information package is developed that outlines details of its assets and amounts. Subsequently, an asset valuation is conducted by the agency to determine the appropriate resolution plan. In preparation for closure, on-site analysis is performed by the FDIC to determine uninsured dollar deposits at the bank and investigate potential fraud via document analysis from both submitted and recovered failed bank documents. Finally, the failed bank is marketed as soon as possible by FDIC in order to attract buyers for its assets.

Several indicators can be used in identifying whether a bank may face issues such as declining stock value or high executive turnover rates. Additionally, unexplained changes in management should be taken as warning signals.

The FDIC has several approaches to assume control of a bank, such as shutting it down and reimbursing all depositors, managing and running the bank, or liquidating the bank's assets. Additionally, troubled banks may receive financial aid from the FDIC. To evaluate and value a failed bank's assets for resale, the FDIC uses a receivership process. The FDIC places great importance on reimbursing both insured and uninsured depositors equally. In 1991, the US Congress passed the Federal Deposit Insurance Corporation Improvement Act (FDICIA) to prevent bankruptcies in banks.

Madura (513) proposed an act that aims to penalize banks for engaging in high-risk activities and reduce the regulatory costs of troubled banks. Meanwhile, the FDIC plans to merge with stable banks

and has the authority to sell assets of failed banks to other banks. The FDIC will opt to absorb the failed bank's assets to prevent future issues from occurring if they cannot be sold to acquiring banks, selling government securities if necessary (Sprague 224). Asset liquidation will start at the main office and proceed to regional and sub-regional offices, categorized and supervised by a specialist chosen by FDIC. 

According to Sprague (225), if a business asset is experiencing continuous trouble, the FDIC will allow it to operate until recovery in order to maintain its value. The FDIC is currently creating a list of potential buyers or acquirers, including financial institutions and private sector entities who are both worthy and financially capable of acquiring additional assets. The Board of Directors of the FDIC is responsible for determining and implementing a low cost transaction, as well as announcing the winning bidder for the failed bank's assets. After closing, the FDIC prepares specific documents to facilitate proper asset transfer to the buyer and determines payment amount. The successful bidder must conduct due diligence at the failed bank to assess record, account, and book value.

The board of directors of the failed bank approved FDIC's due diligence before inspection. The United States government issued government securities, which are highly creditworthy because they are fully supported by the government. FDIC insures deposits of all depositors, meaning that if a bank fails, depositors will receive a specific amount insured by the FDIC. The FDIC divides deposits into two funds: the BIF (Bank Insurance Fund) insures all state and national banks that are members of FRB, regardless of whether they are insured or uninsured.

SAIF

insures federal savings, thrift banks, and loan association institutions, while FDIC insures the full amount up to $100,000, adding retirement and money market accounts for IRA, Roth IRA, and SEP IRA insured up to $250,000. For joint accounts, the insured amount is $200,000 and $100,000 for beneficiary trusts with one beneficiary. If bank deposits exceed $100,000, additional funds can be recovered with no guarantee to retrieve everything. The amount recovered depends on how much the FDIC retrieves through selling bank assets to lenders. Deposits in uninsured banks are not covered by FDIC insurance.

Weinstock & Breckinridge (2) state that in case of bank failure, uninsured depositors are typically compensated a proportion of their deposits based on the amount regained by the FDIC through liquidating the bank's assets. To protect American depositors from the present financial crisis, the Federal Deposit Insurance Corporation has instituted new monitoring regulations for banks and financial institutions. Amongst these modifications is the implementation of automated sweep transactions across all banks. However, as stated by FDIC guidelines regulating deposit insurance and failed banks, funds transferred from insured accounts to non-insured accounts will not be insured.The FDIC has enforced two new initiatives. One is a deposit regulation that will persist until July 1, 2009. The other program is a temporary liquidity guarantee program established to fortify depositor's confidence, promote liquidity in banks and thrifts, and boost investor's assurance in lenders. The FDIC declared this program on October 14, 2008, which was valid for all US domestic banks for thirty days. Many banks demonstrated their dedication by paying assessments to ensure unlimited protection and financial security for their depositors (Weinstock & Breckinridge 1). According to

Janney Montgomery Scott LLC's report published in 2008, investors who comprehend the specifics of FDIC coverage have an advantage in compensating appropriately for the risks they take.

Amidst a challenging financial environment where people are anxious about their finances and seeking ways to save and protect their money, it is crucial to gain knowledge of various institutions' rules and regulations. While the ability to be creative, solve problems, and develop new strategies is vital for securing a better future, these pursuits may not be the main focus for most people at present due to the economic crisis. Despite the potential for measures and decisions to worsen or alleviate economic conditions, it is essential to put in more significant efforts to overcome the crisis that affects every single American.
Works Cited: Carmichael, D., Whittington, Ray, and Lynford Graham. Accountants' handbook.

New Jersey-based publisher John Wiley and Sons released a CD update in 2007. Janney Montgomery Scott LLC provides access to the update via their website, with the last recorded access on May 7th, 2009 through the URL http://www.jmsonlinefc.

The Federal Deposit Insurance Corporation published a document entitled "Chapter 2: Overview of the Resolution Process" in 2008, which can be accessed at http://www.com/facilitypdfs/jmadrihoreb49abd62-cf19-6588-d8f2f8da6cd23395.pdf. The document was retrieved on May 7, 2009.

Be cautious with your banking during economic crises to protect your assets, according to Harry Dennis III's publication available at fdic.gov/bank/historical/managing/history1-02.pdf.

The text contains a citation for the Milwaukee Biztimes article from January 8, 2009, a book titled "Financial Institutions and Markets" by Jeff Mandura published by Cengage Learning EMEA in Connecticut, and an author named Jim Searles.The website titled "Financial Insight" was published by Davidson Investment Advisors and Davidson Trust

Companies in 2008. The webpage can be accessed at http://www.davidsoncompanies.com, as of May 7th, 2009. The original text was enclosed by for paragraph formatting.

Washington D. is home to Bailout: An Insider's Account of Bank Failures and Rescues by Irvine Sprague, available at com/dc/files/newsletters/42.pdf;

The source of the text is a book called "FDIC Closed-Bank Rules Yield Surprises for Sweep Accounts" written by Peter G. Weinstock and Zonnie Breckinridge and published by Beard Books in 2000.

The source of the information is a webpage on the website of Hunton & Williams LLP published in November 2008. The URL for accessing this page is http://www.hunton.com/files/tbl_s10News%5CFileUpload44%5C15743%5CFDIC_Sweep_alert.pdf and it was accessed on May 7, 2009.