Debt Consolidation

Bank Mergers & Failures and What They Mean to You

Posted on: April 20, 2010
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Since 2007, America has seen the highest amount of bank failure and merging since the Great Depression of the 1930s. In 2010 alone, about forty banks have failed. This pitfall was brought on by a liquidity shortfall in the United States banking and has resulted in the failure of large financial banks and stock declines. Along with the banking failures, the housing market has suffered, resulting in a number of evictions and foreclosures . This financial crisis is commonly referred to as “the Great Recession”.

What is a Bank Merger?

A bank merger is when two or more banks reorganize and form into one bank, but only obtains one identity. Normally, the larger of the two banks retain the name. Think of it as a marriage between the banks, instead of maintaining two separate identities, the banks combine, absorbing one and falling under a single business identity.

When a bank merger occurs, it involves the changing of stock, avoiding taxes. A bank merger can achieved in two ways:

  • Negotiating a leverage buy out with the management team
  • Directly working with the stockholders of the company

What is a Bank Failure?

A bank failure occurs when a bank is unable to uphold its financial obligations to its customers. Usually a failing bank becomes insolvent and is not being able to meet its financial liabilities. Also, if the bank is not able to meet the demands of all depositors it could be overtaken if the Shareholders Equity falls below minimum required amount.

When a bank is on the verge of failing, it is advised not to pull money out of a bank. Doing this may result in a downward tailspin known as a "bank run" and often causes the bank's liquidity to become unstable and fail. While it's unsettling to watch a bank struggle, the best thing is to do is wait and verify personal information with the bank is on file in case of a failure.

FDIC and Bank Failures

How does the Federal Deposit Insurance Corporation (FDIC) help during a bank failure?

First, the FDIC takes complete control of the failing bank and begins searching for healthy banks/lending institutions to assume the customer accounts of the failed bank. If the FDIC is unsuccessful and cannot find a reasonable solution it will work with the bank's customers directly.

Most banks are members of the FDIC. The FDIC insures individual bank accounts up to $100,000 per depositor. If the FDIC fails to keep a bank open, they will send a check for the amount in the savings account.

How Does a Bank Failure Affect Me?

The process of a bank failing is absorbed by a competing banking institution and presents no a limited immediate effect on the average consumers banking, such as writing checks, using debit cards, and electronic transfers. However, if the bank fails and isn't purchased, a person must wait for the FDIC to issue a check. If a deposit is made uninsured to the bank, the FDIC will not cover it. It will first handle the financial transactions of the failed bank, after that, it will distribute any leftover money within its creditors.