There have been 13 bank failures this year, including this week’s Washington Mutual Inc. — the largest bank failure in U.S. history. Another large bank, IndyMac, went broke in July. While that number is still well below the number of financial institutions that went bankrupt during the savings-and-loan crisis of the late 1980s and early 1990s, it has depositors on edge.

The vast majority of depositors have less than $100,000 in their accounts and are protected by federal insurance no matter what happens to their banks. Still, there are steps large depositors can take to protect themselves, and things that any saver can do to minimize hassles in the coming months. Here is a primer on bank collapses:

What happens when a bank fails?

If another bank buys the bank, as was the case with J.P. Morgan Chase & Co. buying WaMu this week, then it is business as usual. Customers of the failed bank can continue to write checks and withdraw their money — typically without any interruption in service.

If, however, no buyer steps in, then the Federal Deposit Insurance Corp. will start mailing out checks to customers for their insured deposits within 48 hours. Those with amounts over the FDIC’s limits of $100,000 per person, per insured institution, will receive payments as the assets of the bank are sold. Some won’t get all their money back.

How can I tell if my bank is on the verge of failing?

If you’re comfortable with financial statements, take a look at the FDIC’s Web site, which publishes detailed financial information reported by lenders at under “Bank Find.” Similar data for credit unions are available at the National Credit Union Administration’s site at

Beyond that, there are various ratings services that grade the safety and soundness of financial institutions. and, for example, have five-star rating systems that grade financial institutions on their financial health. The more stars, the better.

Keep in mind that even if you have money in a bank with low ratings, your deposits should still be safe. “As long as you’re within the FDIC insurance limits, there’s absolutely nothing for you to worry about,” says FDIC spokesman David Barr. “During our entire history, not a single person has ever lost a penny of insured money.”

I have more than the $100,000 in my bank. How can I extend my FDIC insurance coverage?

Savers can boost coverage at one insured bank by opening deposit accounts in different ownership categories, such as retirement accounts (which are insured up to $250,000), joint accounts and revocable trusts. The FDIC on Friday posted new rules to make it easier for savers to get insurance coverage by using revocable-trust accounts. Previously, account owners could only add certain “qualified” beneficiaries, who were insured up to $100,000 each; the new rule allows depositors to name anyone as a beneficiary.

Big savers can also deposit their money with a bank that participates in the Certificate of Deposit Account Registry Service, or CDARS. The deposit-placement service disperses the funds in individual CDs under $100,000 in member banks. A single depositor can place up to $50 million and have it all covered.

Consumers can use the FDIC’s EDIE the Estimator program at to determine if their deposits are within coverage limits.

Will my deposits continue to earn interest if my bank is seized?

If the bank is bought, then it is up to the acquiring bank to determine whether it wants to maintain the current interest rates. If the interest rate is lowered, you may withdraw insured funds without penalties — even if your money is locked up in a long-term certificate of deposit. If there’s no buyer, the interest stops accruing on the date of the bank failure.

If you have brokered CDs, you may stop earning interest when the bank is seized by the government — unless the deposits are bought by a new bank. Brokered CDs at WaMu, for example, will continue to earn interest because they’re now part of J.P. Morgan. But deposits in brokered CDs at IndyMac Bank stopped earning interest when that bank failed.

Does the FDIC have enough money to cover insured deposits?

The FDIC has $45 billion in its coffers to cover insured deposits. If the cost of future bank failures exceeds that amount, then the FDIC can draw on other resources to protect depositors. Indeed, the FDIC is looking at raising the rates that it charges the banks it insures as a way to bring in additional funds. The FDIC can also draw on lines of credit with the Treasury Department — something it last did in early 1991, although it paid back any borrowed funds with interest by mid-1993.

WSJ Business – September 27,2008