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What if my bank fails?

The big banks will have to trudge back to the drawing board to rewrite (again) the “living wills” that will help them die gracefully if their time ever comes. Unacceptable plans will mean they could face additional restrictions on their future growth or they might even be broken up.

These plans are being written as a result of new regulations after the financial crisis. Banks must shape up their bankruptcy contingency plans, and pass a “stress test” to show that their policies and practices are sturdy enough to weather another financial storm.

Currently, eleven of the biggest banks in the U.S. — those with assets greater than $250 billion — are being told by the U.S. Government Accountability Office (GAO) that their contingency plans aren’t strong enough, as the Wall Street Journal Reports. The Federal Reserve and the Federal Deposit Insurance Corporation agree that the banks haven’t done enough to show that the collapse of one bank wouldn’t have a domino effect on the economy.

What the pundits are saying

Matt Levine’s article in Bloomberg, “Banks aren’t too Big to Fail Unless they Fail” captures the spirit of the finding. A bank might fail, and the system will be able to absorb the impact of that single bank’s failure. “But the big worry,” writes Levine, “is that a big bank will be in trouble at the same time, and for the same reasons, as every other big bank.”

This article in Fortune rounds up some of the other main responses to the GAO study. Whatever your opinion on the “too big to fail issue” might be, bank failure can have a lasting impact on the economy, and could have terrible consequences for your business.

It’s not just the big guys

Bank failure can happen at any time. In fact, a GAO report released in 2013 reviewed why smaller banks were failing between 2008 – 2011 and found that credit losses on commercial real estate loans were a big reason for bank failure, while some of the banks pursued “aggressive growth strategies using nontraditional, riskier funding sources and exhibited weak underwriting and credit administration practices.”

As a bank customer, you can’t be expected to know the bank’s policies on investing and underwriting. The only way you can navigate safely at the bank is knowing that the accounts you hold are covered by FDIC insurance, and understanding what your deposit caps are for that coverage.

On the off-chance

If you own a business, make it your business to understand the FDIC policy and how it works. If your deposits typically exceed covered amounts, work with your financial advisors to create the best arrangements for making deposits at multiple banks, or spread your assets in such a way that they’re working hard for you in the best and safest way possible. That way, a bank collapse might impact you in the short term, but at least you’re covered for the long term.

Businesses that have to rely on large bank deposits that sometimes exceed FDIC caps may be vulnerable. Depending on what kind of business model you have, you may want to consider a captive insurance policy, which could provide added insurance to cover a loss of deposits in excess of FDIC limits if your bank failed. Contact us if we can help you explore a captive option.