When a bank fails, investors may experience significant losses. The exact outcome for investors depends on several factors, such as the type of investment they hold and the severity of the bank’s failure.
If an investor holds shares of stock in the bank, the value of their investment may decline or become worthless. Additionally, if the bank goes bankrupt, investors may be last in line to receive any remaining assets after other creditors have been paid.
If an investor holds deposits or other accounts with the bank, they may be insured by a government agency such as the Federal Deposit Insurance Corporation (FDIC) in the United States. In this case, the investor may be able to recover their deposits up to a certain amount, typically $250,000 per account per depositor. For investors, their shares may be worth little to no value, so they may turn to credit default swaps. A credit default swap (CDS) is a financial contract that allows one party to transfer the credit risk of an underlying asset, such as a bond or loan, to another party. In the case of a bank failure, a CDS holder may receive a payout if the bank defaults on its obligations.
If a bank fails and the CDS is triggered, the protection buyer (the party that purchased the CDS) will receive a payment from the protection seller (the party that sold the CDS) to compensate for the losses incurred due to the bank’s default. The payment amount is typically based on the difference between the face value of the underlying asset and its market value at the time of default.
However, the use of CDS can be controversial, as it can increase systemic risk in the financial system. For example, if many banks hold CDS contracts on the same underlying asset, such as a mortgage-backed security, a default on that asset could trigger multiple payouts, potentially leading to a cascade of defaults and systemic risk. Overall, the use of CDS in the case of a bank failure can provide some protection for investors, but it is important to be aware of the potential risks and to consider alternative risk management strategies as well.
It is important for investors to understand the risks associated with investing in any financial institution and to research the institution’s financial health before investing. If your bank fails, here are 3 steps you can take:
- Check if your deposits are insured: In the United States, the FDIC insures deposits up to $250,000 per account per depositor. If your deposits are insured, you may be able to recover them through the FDIC.
- Review your accounts: Review your account statements and make a record of your account balances and transactions. This information may be helpful if you need to file a claim with the FDIC or take legal action.
- Seek professional advice: Consider seeking advice from a financial advisor or attorney who can help you understand your options and protect your interests.
It is important to stay informed and be proactive if your bank fails. Remember that while a bank failure can be stressful, there are resources available to help you recover your funds and protect your financial future. If you have questions about safeguarding your future, contact attorney Jess Cino for more information.