What if my bank fails?

Nearly twice a week last year on average, banking regulators closed a bank deemed unable to meet obligations to depositors and others. And while the number of bank failures was down from a year earlier, (92 vs. 154), that’s little consolation if you’re a business owner caught up in your bank’s closing.

 “The FDIC has seen about 250 bank failures in the past two years, and business owners understandably get concerned,” said Tim McPeak, director of financial markets advisory services at Sageworks Inc., a financial information company. “Hearing that your bank has been closed can be unsettling.”

But in many cases, McPeak and others say, business owners may notice few changes – even if another bank purchases your bank’s assets.

So what should you do if your bank has failed or is in trouble?

“Don’t panic,” said Sandy Moll, president of Advanced Bank Solutions, an Olathe, Kansas, consulting firm that works with healthy and troubled financial institutions. 

Moll noted that the Federal Deposit Insurance Corporation, which insures deposits and acts as the receiver of failed banks, provides standard insurance of $250,000 per depositor, per insured bank, per each ownership category. A link on the FDIC website allows you to check the insured status of each of your accounts once a bank fails. Here’s a link with details on how depositors are treated to ensure your accounts are protected as currently set up.

In many cases, your bank simply changes ownership, but if the FDIC can’t find a new owner, it will disburse funds.

As for what happens with your borrowings, it depends largely on your loan’s standing, according to industry experts.

“If you’re current in your loan payments and in conformance with your lending agreement, then generally you have almost nothing to worry about,” said Kenneth Friedel, a former banker and regulator who is now consultant manager to accounting firm Kennedy and Coe LLC’s financial institutions group. 

A surviving bank or investor looks for quality assets, and if you’ve been paying as agreed, then not only will your loan be valued as an asset, but you’ll also be valued as a customer, generally speaking, Friedel said.

In fact, Moll said, “You may find your new bank is a better fit for your needs.”

 Better service, more capable bankers, better technology and perhaps even a higher legal lending limit could all be byproducts.

Conversely, if your loan payments aren’t current or you’re not conforming to other terms, Friedel said, “Chances are, you’re part of the problem, not part of the solution.”

At that point, your situation doesn’t necessarily change, he said. You still need to do whatever you can to shore up your business — boost cash flow, revenue or collateral. 

Some borrowers incorrectly assume they can stop paying on loans to failed banks. “The first thing NOT to do is stop making payments,” Friedel said. Whoever takes over your bank – whether it’s the FDIC or another bank – “rest assured, they do the paperwork and they track the payments or nonpayments,” Friedel said. “They’re going to do as good or better a job at keeping track.” 

And they might have more capital and deeper pockets with which to pursue repayment or even prosecute.

No matter your standing with your bank, be diligent in documenting your accounts and loans. And maintain a relationship with your banker, even if you’re having financial trouble, so that management can advocate for you.

“The more they know about you, your character and capacity, the more they can say, ‘This guy’s having problems, but he’s working with us; he’s doing what he can,’” Friedel said.

A business owner’s biggest risk might be continued access to a line of credit used for working capital. In most cases, you’re less likely to have any interruption if you’re a good borrower, Friedel said. “There’s no guarantee if you’re not.”

He doesn’t recommend opening up a backup line of credit at other banks, but it may be a good idea to know other bankers and maintain friendly contact with them – just in case.