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How does the FDIC take over a failing bank?

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kisstopher603 | Valedictorian

Posted May 7, 2012 at 1:42 PM via web

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How does the FDIC take over a failing bank?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted May 7, 2012 at 1:55 PM (Answer #1)

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The FDIC does not exactly take over failed banks.  That is, it does not start to run such a bank on a permanent basis.  Instead, it takes on the role of "receiver" for that bank. 

When a bank fails, whatever entity (usually a state) has chartered the bank closes that bank.  It then appoints the FDIC as the receiver of the bank.  At that point, the FDIC has three options.  It is required by law to choose the one that will cost the least.  The FDIC can:

  • Find a buyer for the bank and its assets.  This is typically the most attractive solution.
  • Pay off the depositors in the bank using money the FDIC has collected from banks and invested.
  • Provide money to "bail out" the bank.  This is typically done if there is a fear that the failure of the bank will harm the overall economy.

The FDIC, then, only acts as temporary receiver of a failed bank.  It takes it over in this way by being appointed as receiver by the entity that chartered the bank.

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