Don’t worry too much about losing your bank cash. Bank-failure data don’t support panic over uninsured deposits.

All that drama, however, was at odds with federal data showing that bank failures stretching back to the start of the 2007-2009 global financial crisis have in aggregate done very little harm to uninsured depositors. Less than 7% of the banks that failed since the start of 2007–or 37 out of the 541 bank failures over that period–had uninsured depositors who have not yet fully recovered their cash, Federal Deposit Insurance Corp. data show. Bank failures that did put uninsured depositors at risk were overwhelmingly very small institutions, with 30 of those 37 banks having total deposits at the time of failure under $1 billion. 

In total, account holders affected by the bank failures since 2007 have not yet recovered about $145 million in uninsured deposits, the FDIC data show–a small sliver of the roughly $780 billion in total deposits at banks that failed over that period. In only one case–a tiny bank that failed in 2010 with less than $6 million in deposits–account holders have not recovered any of their uninsured deposits, the data show, with uninsured depositors at other failed banks seeing a wide range of recoveries, from about 33% to 100% of their uninsured money. In many cases, uninsured depositors at the failed banks may recover additional amounts in the future as the receivership process continues.   

The bank-failure data shed new light on the questions surrounding this year’s banking turmoil, including when it’s appropriate to “bail out” uninsured depositors, what the deposit insurance cap–currently $250,000–really means to bank customers, and whether it makes sense to raise that cap in light of the Silicon Valley Bank and Signature Bank failures. The numbers illustrate that the FDIC’s standard procedures for resolving failed banks–which often involve selling the assets to a healthy bank that then assumes all deposits–have effectively shielded uninsured depositors from losses. 

If that fact had been better known, much of the turbulence of recent weeks might have been avoided, some experts say. Large account holders at Silicon Valley Bank “were really afraid of losing everything,” said Todd Phillips, a policy advocate and fellow at the Roosevelt Institute, a think tank. Their agitation, amplified by “a lot of really loud people on Twitter,” Phillips said, created the environment that prompted regulators to declare a “systemic risk exception” that swiftly and decisively protected all depositors at Silicon Valley Bank and Signature Bank rather than allowing the FDIC’s standard bank-resolution process to play out. The FDIC’s standard process may have resulted in “a slight haircut” for uninsured depositors, said Phillips, a former FDIC attorney, “but nothing like losing everything.”

To be sure, any hiccups in access to bank deposits can be a major issue for account holders, with potential broader repercussions for workers and the economy if companies can’t process payroll and pay operating expenses. Such concerns have fueled a debate over the appropriate policy response that has focused largely on more drastic changes–such as raising or eliminating the deposit-insurance cap–that may come with a hefty price tag that could ultimately be borne by bank customers. But other options should be on the table, some experts say–such as improving the systems already in place. Patricia McCoy, a law professor at Boston College Law School, for example, suggests regulatory changes could make it easier for the FDIC to negotiate the purchase agreements whereby healthy banks often assume all deposits–insured and uninsured–of failed banks. It makes sense to focus on paving the way for those agreements, she said, “because they’re a pretty good outcome and a pretty good way of protecting uninsured depositors without raising deposit insurance caps.”  

There are also many ways for account holders to keep large amounts of cash fully covered within the existing deposit-insurance limits. 

The FDIC is reviewing the deposit insurance system and has said that by May 1 it will release a report on policy options related to deposit insurance coverage levels and excess deposit insurance. But regulators can’t make sweeping changes in deposit insurance coverage without Congressional approval. Some lawmakers have called for lifting the deposit insurance cap, although the idea hasn’t garnered broad bipartisan support. 

The concentration of uninsured deposit losses among the smallest banks is an issue, some experts say. “We do see a distinct pattern that if the FDIC is not able to arrange an assisted merger for a small failed institution, it will let the losses fall as they may on uninsured depositors and not give them any special protection,” McCoy said. That pattern can encourage flight of uninsured deposits to larger banks in times of stress, as seen in recent weeks, and leave less funds available at small community banks to lend out, with “real credit consequences for smaller communities,” McCoy said. 

The FDIC is generally required to resolve failed banks in the manner that creates the lowest costs for its deposit insurance fund. (The exception to that rule is for “systemic risk”–the exception declared for Silicon Valley Bank and Signature.) In most cases, the lowest-cost approach is also the one that causes the least disruption to depositors: a healthy bank buys assets of the failed bank and assumes the deposits. Often, a healthy bank is willing to assume all deposits, both insured and uninsured. “This approach benefits both the FDIC and depositors,” leaving the FDIC with “fewer liabilities to retain, and depositors receive protection above and beyond FDIC deposit insurance limits,” said John Popeo, a partner at advisory firm Gallatin Group and former FDIC lawyer who helped sell failed banks during the global financial crisis. 

In some cases, however, an acquiring bank takes on only the insured deposits, and the FDIC then pays off uninsured depositors over time as funds become available. And in other cases, there are no acceptable bids for the failed bank’s assets, and the FDIC pays off all insured depositors immediately and sells off the assets gradually, generally leading to partial payouts to uninsured depositors over time. 

Fire in the boardroom 

The most recent bank failure to generate losses for uninsured depositors is also one of the more bizarre. In May 2019, a fire broke out at Enloe State Bank in Cooper, Texas. Anita Moody, the bank’s president at the time, later acknowledged in a court filing that she had set fire to a conference room table in the bank’s boardroom in an attempt to conceal her fraudulent loan activity, which had personally benefited Moody and some of her friends and family members. “Several loan files on the conference room table were destroyed in the fire,” the court filing said. Moody pleaded guilty to conspiracy to commit bank fraud and arson, agreed to pay restitution of $11.1 million, and was sentenced to eight years in prison. 

Moody “has experienced great remorse over these events and took full responsibility for her actions from the beginning of the investigation,” John Ginn, an attorney for Moody, said in a statement to MarketWatch. “She is now serving her sentence and I am sure she is trying to make amends to the best of her ability.” 

Enloe was closed by the Texas Department of Banking a couple of weeks after the fire, and the FDIC reached an agreement with a healthy bank to assume the insured deposits–but not the uninsured deposits, which amounted to less than $500,000 at the time of failure. Enloe customers have recovered about 40% of their uninsured deposits, according to the FDIC data.  

Among banks that have failed since the start of 2007, a single bank–IndyMac–accounts for roughly two-thirds of the total amount not recovered by uninsured depositors, according to the FDIC data. But the situation for IndyMac’s uninsured depositors ultimately proved less dire than it appeared when the bank failed suddenly in July 2008, in part because the 2010 Dodd-Frank Act permanently raised the deposit insurance cap from $100,000 to $250,000 and made that increase retroactive to any bank failure from the start of 2008 forward. Although the FDIC initially said at the time of IndyMac’s failure that the bank had about $1 billion of potentially uninsured deposits, the amount of uninsured deposits not recovered by IndyMac customers is about $94 million, according to the FDIC data. 

Some experts would like to see the revival of a measure that was implemented temporarily during the global financial crisis: guaranteeing all deposits held in non-interest-bearing transaction accounts. During the financial crisis, that measure “protected community banks from losing uninsured business deposits to large, systemically important financial institutions,” Popeo said. Bringing back that guarantee, he said, “would go a long way in terms of bolstering depositor confidence and enabling institutions to provide additional deposit insurance coverage in a sensible way.” 

McCoy, meanwhile, suggests regulatory changes–such as reinstating some stricter liquidity requirements that applied to midsize banks up until a few years ago–could make it easier for the FDIC to negotiate the purchase agreements that tend to produce the best outcomes for depositors and the deposit insurance fund. Such a change would lead to midsize banks holding larger cash balances, she said, and make it more likely that purchase agreements that include the uninsured deposits could pass the FDIC’s least-cost test.