By Kevin Canessa Jr. - Mar 26, 2009
Keywords: FDIC, Federal Deposit Insurance Corporation, economic crisis, deposits, deposit limits, insurance, small banks, small bank failures, bank closings, banksWhen the Federal Deposit Insurance Corporation (FDIC) takes the bold step of closing a bank, people often panic and look to withdraw all of their money. But oddly enough, until the recent economic crisis, rarely did the FDIC shutter banks.
Between 2001 and 2007, the FDIC closed a total of 27 banks. Then the economic crisis hit and 28 banks shut in 2008 alone. Three months into 2009, already the FDIC has closed 20 banks--and, according to reports, the FDIC prepares weekly to fold even more.
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What do many of these shuttered banks have in common? They're small, local institutions, where Blacks and Latinos typically do their banking.
The good news: Among the small banks that are owned and operated by traditionally underrepresented groups and located in Black and Latino communities, few are shutting down. But even if your small bank does go belly up, will you lose all your money?
That's hardly the case. Several months ago, the FDIC raised its insurance limits from $100,000 per account to $250,000 per account, which means that any account with the new threshold or less is protected. In fact, never in the FDIC's history--which dates back to 1933--has anyone lost money when a bank was closed.
What Happens to Closed Institutions?
When the FDIC intervenes, it's usually because the bank got too far over its lending limit. This has happened a lot lately, according to reports, because some smaller banks were willing to lend money to people who simply couldn't afford to pay their mortgages.
When the FDIC steps in, it can do one of three things: take over a bank and run the bank itself; disburse the account funds and close the bank completely; or, most common, host secret, online auctions where larger banks bid to take over the institution. When this happens, the larger bank becomes responsible for every facet of the organization. Under this scenario, typically many of the lower-level bank employees keep their jobs, while upper management is replaced by executives brought in by the purchasing bank.
What About Black- and Latino-Owned Banks?
Back in November, DiversityInc reported that for the most part, Black- and Latino-owned and managed banks were surviving the economic downturn, albeit under tighter and stricter standards.
Paul Hudson, a third-generation chairman and CEO of Black-managed Broadway Federal Bank of Los Angeles, for instance, has made it clear that his bank refuses to offer loans to people who can't afford to repay them. Because of this, smaller, more conservative banks are unlikely targets of closings.
"It didn't make sense to make loans to people when you knew they couldn't make the payments," Hudson said. "The fact that we're still lending is the biggest thing we're doing to help serve the neighborhoods we serve."
Click here to see a list of banks the FDIC has closed since 2000.
