As news rolled in about the recent failure of Silicon Valley Bank and the government takeover of Signature Bank, many people were understandably nervous. One of my overseas clients texted me that he had money on deposit at one of those banks and worried that it was gone forever.
As the government and banking industry grapples with how to avoid such crises in the future, individuals and businesses need to know how to protect themselves and what options they have in the event they face a similar situation.
When your Bank Fails, Know Your Options
When a bank fails (essentially running out of money) or goes into receivership (a form of government or court-ordered takeover intended to preserve remaining assets), individual and commercial depositors should immediately consider the following options:
Collect Guaranteed Deposit Insurance: The FDIC (Federal Deposit Insurance Corporation) generally insures deposits up to $250,000 per depositor per bank. Although it may take some time to actually receive the funds, depositors can at least be reasonably sure that funds up to the monetary limit will be protected. In the case of Silicon Valley Bank and Signature Bank, the federal government agreed to protect depositors even beyond this cap, but it is unclear whether that will apply to other banks in the future. Holding certain types of assets in a joint account can increase the amount of the coverage. In addition, opening accounts at separate banks will allow you to take advantage of the “per depositor per bank” maximum coverage.
Submit A Creditor Claim: If a bank goes into receivership or bankruptcy, depositors may be able to file a claim as a creditor. This means they are owed money by the bank and have a legal right to receive a portion of the bank’s assets when they are distributed. However, depositors may not receive the full amount of their deposit, and the process can be lengthy.
Pursue Transferred Assets: In some cases, the deposits of a failed bank may be transferred to another bank (known as a “bridge bank”). This can happen through a purchase of the failed bank’s assets by another bank or by a government agency. Depositors’ accounts can then be retrieved from or maintained at the new bank. Direct deposits of pay checks or Social Security can also be re-routed to the bridge bank.
Legal Action: In some cases litigation is necessary to retrieve deposits from the failed bank or from a government trustee or receiver. Litigation can be costly and time consuming and there is no guarantee that any funds will be recovered at all. Still, this is an option that must be considered in consultation with a qualified attorney.
Consult SIPC: Accounts with brokerage firms, typically containing securities, are protected under a different set of regulations and an entity called the Securities Investor Protection Corporation. SIPC generally covers up to $500,000 per customer although in certain situations the amount can be higher. When a brokerage firm fails, SIPC will attempt to transfer the accounts to a new firm and process claims for any funds that are missing. The SIPC website should be consulted for further details.
Be Proactive. Protect Yourself Against A Future Financial Crisis
It’s important to be proactive in protecting your assets before a crisis occurs. Many people only learn that their bank is in trouble after it’s too late. One way to check the financial health of a bank is to obtain its “rating”. Standard & Poor’s rates banks based on their financial strength and ability to meet financial obligations. Ratings range from a high of AAA to a low of D. Moody’s Investors Service offers ratings from AAA (highest) to C (lowest). These and other services can provide detailed research data to help depositors learn more about the strength and health of a particular bank or financial institution. In addition, many banks will display their ratings on their own websites or in their publicly available annual reports.
Of course, there is no substitute for a direct conversation with a personal banker or account manager regarding not only the financial health of the bank but also what programs or products the bank might offer to protect your accounts in a worst case scenario.
If your business is experiencing a financial crisis due to a bank failure or other calamity, or you simply want to discuss strategies and options to protect your assets, consultation with legal counsel is advisable. Our team of experienced lawyers can assist you in a wide variety of areas of law. If you need assistance, give me a call or email me and I’ll be happy to help.
If you have questions, please contact us
If you have any questions or if you would like to discuss the matter further, please contact me, Bruce Feffer, or the Scarinci Hollenbeck attorney with whom you work, at 201-896-4100.
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