Q&A About Bank Failures and the FDIC's Role

A cascade of bank failures has magnified the role of the Federal Deposit Insurance Corp., which guarantees around $4 trillion in deposits in U.S. banks and thrifts.

More than 100 banks have collapsed so far this year, the largest number in a year since the early 1990s, at the height of the savings-and-loan crisis. Some experts say 300 to 400 more banks could fail in the next couple of years.

Here are some questions and answers about the independent agency born of the bank collapses of the Great Depression. The FDIC is funded by insurance premiums paid by the roughly 8,100 U.S. insured banks and savings institutions.

Q: What does the FDIC do?

A: The FDIC, like other bank regulatory agencies, sends examiners to banks and assesses their financial soundness to try to prevent problems. The agency has been using a combination of offsite monitoring and onsite exams to keep up. The FDIC has been urging banks overall to bolster their capital and reserves against losses on loans.

Q: So what happens when a bank fails?

A: Even before a wobbling bank is closed, FDIC staff often quietly seek buyers — stronger banks or private investor groups — for its deposits and loans.

Depositors' money is not at risk. The FDIC guarantees deposits up to $250,000 per account, and no holder of an insured account has lost a penny since the insurance fund was created in 1934.

The FDIC itself doesn't close banks. That decision is made by the state banking regulator, the U.S. Office of the Comptroller of the Currency or the Office of Thrift Supervision, depending on what the bank or thrift's charter. Once an institution is shut down, the FDIC is appointed receiver and takes over the process of selling its deposits, loans and other assets, sometimes keeping a portion of the assets to be sold later.

Responding to the spate of bank failures, which began to quicken in mid-2008, the FDIC has employed strategies such as sharing the losses on a failed bank's portfolio of loans with the bank that buys those soured assets. For 53 of the 124 banks that have fallen since January 2008, the FDIC has signed loss-sharing agreements covering about $80 billion in loans.