Fact Check: Will the FDIC take almost 100 years to repay money in my failed bank’s account?

June 07--Times-Union readers want to know:

I read in an email that the Federal Deposit Insurance Corp. can have 99 years to repay your money if your bank fails. Is that true?

An independent agency, the FDIC was created in the aftermath of the 1929 stock market crash when the government wanted to stabilize the banking system and reassure Americans about their deposits.

The email's urban legend is just that, according to the FDIC, the Wall Street Journal, Snopes.com and Bankrate, which collects national financial rate information.

FDIC insurance covers all deposit accounts, including checking and savings accounts, money market deposit accounts and certificates of deposit. It does not insure funds in credit unions, life insurance policies, or money invested in stocks, bonds, mutual funds or annuities.

The amount covered by the FDIC has changed over the years. In 1934, the limit was $2,500 and rose to $100,000 in 1980. In October 2008, Congress temporarily raised the FDIC insurance limit to $250,000 per account. That was supposed to stay in effect through 2009, but at the time was extended through the end of 2013.

In July 2010, the limit was permanently raised to the current $250,000 per depositor, per insured bank, for each account, the FDIC website states.

Bank failures in the U.S. haven't been too common since the savings-and-loan crisis of the late 1980s, so many consumers aren't that familiar with how FDIC deposit insurance works, Snopes.com notes.

When a bank fails, according to Savingsaccounts.com, regulators announce the closure on a Friday. They've usually already lined up another bank willing to buy the failed bank's business, minus their problem loans and troubled assets.

The regulators hand over the management of the failed bank to the FDIC, which makes sure the transition is seamless when the new bank opens on Monday. During the transition, customers can still use ATMs, checks and debit cards, just as if nothing had happened, Savingsaccount.com states. The bank then reopens under new ownership and access to accounts continues.

The FDIC gets its money from premiums paid by insured banks. It also has a huge line of credit (billions) with the U.S. Treasury. And if that isn't enough, the government guarantees that it will provide financial underwriting no matter what.

Rumors that the FDIC has 99 years to reimburse depositors or that FDIC insurance only covers just a small percentage of the deposit amount have been popping up in various blogs and posts over the years, Bankrate says.

These rumors are so prevalent that they were included in a list of the top 10 misconceptions about the FDIC published in the spring 2006 edition of the FDIC Consumer News newsletter, Snopes.com found. Teri Cullen, writing for The Wall Street Journal in November 2007, also covered the misinformation in a blog titled "FDIC Myth Busters."

Here is how the FDIC addressed the issues:

"If a bank fails, the FDIC could take up to 99 years to pay depositors for their insured accounts.

"This is a completely false notion that many bank customers have told us they heard from someone attempting to sell them another kind of financial product. The truth is that federal law requires the FDIC to pay the insured deposits "as soon as possible" after an insured bank fails. Historically, the FDIC pays insured deposits within a few days after a bank closes, usually the next business day. In most cases, the FDIC will provide each depositor with a new account at another insured bank.

"The FDIC only pays failed-bank depositors a percentage of their insured funds.

"All too often we receive questions similar to this one: Is it true that if my FDIC-insured bank fails, I would only get $1.31 for every $100 in my checking account?" ... Federal law requires the FDIC to pay 100 percent of the insured deposits up to the federal limit -- including principal and interest. If your bank fails and you have deposits over the limit, you may be able to recover some or, in rare cases, all of your uninsured funds. However, the majority of depositors at failed institutions are within the insurance limit, and insured funds are always paid in full."

The Cullen article says that the misinformation is probably spread by people selling their own insured -- and commission-generating -- accounts.

The FDIC website at www.fdic.gov has a lot of useful information, including a database (www.FDIC.gov/bankfind) or free phone number (877) 275-3342) to find if your bank is insured.

Carole Fader: (904) 359-4635

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