Bank failures and bank runs are phrases that hearken back to the era of the Great Depression, during which there was more than 9,000 bank failures, with – according to some historians – depositors losing $140 billion by 1933. While the banking system has evolved and changed since that era, the fact remains that bank failures still do affect the average American. Experts expect that the recent failure of IndyMac, the second largest bank failure in history, will be followed by more bank failures and not just failures of small, regional banks lower on the financial services food chain. Therefore, understanding how bank failures can affect you and your finances is important and timely.

The most obvious way that the average person is affected is if his or her own bank fails. When this happened during the Great Depression, the protections that depositors are offered today were not a part of the banking industry, which is why so many depositors lost so much of the money they placed in deposit with banks. Today, depositors do enjoy a certain degree of protection, as long as they place their funds in Federal Deposit Insurance Corp. insured banks and similar institutions. However, total protection from loss due to bank failure is not automatic, and even today, when a bank fails, its depositors can lose a significant portion of their money.

The FDIC insures retirement accounts for up to a $250,000 loss, with regular individual accounts being insured up to $100,000, explained a May 9, 2008, BankRate.com article. Monies beyond those amounts, according to BankRate.com, can eventually be recovered, but it will take time and there is the likelihood that depositors will lose a portion of their monies, because as David Barr, spokesman for the Federal Deposit Insurance Corp. said in his interview with BankRate.com,  “the amount uninsured depositors receive for their excess funds varies.” He went on to say that he’d “seen it range from 40 (cents) on the dollar to 100 cents on the dollar; on average it’s around 72 (cents on the dollar).” 

However, it is not merely the individual depositor in a failed bank that is affected by a bank failure. Bank failures have a significant impact on the economy as a whole, as well as on the average American. That’s because a major bank failure affects other banks that that bank does business. Recent reports, for example, claim that Washington Mutual has suffered from the IndyMac failure, and a decreased confidence in banking as a whole has had a negative affect on stock prices, with shares in some banks dropping more than one third in price.

The main way that the individual feels the affect of bank failures is in an overall constriction of credit. The pool of funds available for financing loans is reduced, not just for the individual seeking credit, but also for businesses. That can contribute to a reduction in available jobs and a general economic malaise, particularly in the current economic situation, in which the nation, even the world, is already dealing with what has been termed a credit crisis, which developed as a part of the fall-out of the mortgage and lending melt-down.

The scenario that has many economic experts and bank officials, as well as the federal government, concerned is the potential of multiple bank failures. Already the economic system as a whole is going through numerous challenges – such as the falling dollar, high oil prices, increasing food prices, mortgage and lending matters, and the deflation of the housing bubble – and multiple bank failures, especially among the biggest names in banking, most of whom are suffering from sub-prime mortgage and credit related woes, could have a huge affect on consumer and investor confidence, as well as further burden an already struggling economy. And, of course, if the government steps in with a bail-out, the average citizen is again affected, as it is his or her tax money that is being doled out.

During this time of economic turmoil, the average American would be well served by taking steps to protect himself or herself financially. Make sure to know and understand the limitations and guidelines of the protections offered by the FDIC, and take steps to ensure that bank accounts conform and will be as protected as possible. Position yourself so as to be better able to ride out a bit of economic challenge by reducing debt as much as possible and devising a spending plan that, even if it means some sacrifice, allows for an increase in personal savings. The economic cycles are already in motion and, at this point, will have to play out. However, while the average American cannot prevent feeling the affects of those cycles, many can be successful in reducing the degree to which they are affected with smart, disciplined financial action.

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