Here's What Happens to Your Loans if Your Bank Fails

There have been several financial institutions shut down by the FDIC.

In the past few weeks, we've seen the highest-profile bank failures in the United States since the financial crisis in 2008. And while things hopefully stabilize soon in the banking industry, there are some important questions on the minds of U.S. bank customers, including what will happen to their outstanding loans if their bank fails. Here's what you can expect if your financial institution gets shut down by regulators.

What happens to your loans if your bank fails?

The short answer is that if your bank fails and you have outstanding loans, you still owe the money.

For more context, when a bank "fails," it means that the FDIC has determined it cannot continue to operate independently for whatever reason (usually it is insolvent, or quickly heading in that direction). In these situations, the agency's top priority is to find a healthy bank to acquire the assets and deposits of the failed bank. After all, the FDIC is the agency that insures deposits, and it doesn't want to pay out money if it can simply find another bank to take over the old bank's operations.

If this happens, the failed bank's entire loan book is transferred to the acquiring bank, and the loan customers will simply owe the exact same amount of money and on the same terms to the new bank. For example, during the 2008 financial crisis, Washington Mutual was placed into receivership by the FDIC in the largest bank failure in U.S. history. The bank's assets and deposits were sold to JPMorgan Chase, and all Washington Mutual branches were rebranded as Chase branches by the end of 2009. If you had a Washington-Mutual-owned loan prior to the failure, you had a Chase loan after the bank was acquired.

If the failed bank isn't acquired right away

There are some other possible scenarios that can happen. Sometimes the FDIC can't find a buyer for a failed bank in its entirety but can sell off the failed bank's assets in pieces to different institutions. For example, in the financial crisis era, buyers may have been interested in acquiring a failed institution's auto loans, credit card receivables, and top-tier mortgages, but might not have any interest in their subprime mortgages.

Another scenario is that it's entirely possible that the FDIC will place the bank in receivership in a newly created institution (controlled by the FDIC) and it will remain there for some time. For example, when Silicon Valley Bank failed on March 13, 2023, the FDIC created and operated Silicon Valley Bridge Bank and transferred all customer deposits (such as savings and checking accounts) into it, with the goal of protecting depositors' access to their money while the FDIC attempts to sell Silicon Valley Bank to a healthy institution.

Whatever the actual process is, the important takeaway is that you still owe the money. Don't use a bank failure as a reason to stop making loan payments. In all cases, you should receive communication from the new bank with instructions on how to continue to make your loan payments and where the money should be sent.

The FDIC will also post information for loan customers. For example, on the FDIC's information page about Silicon Valley Bank, there is a section of information that states: "If you had a loan, you should continue to make payments, including escrow payments, as usual; the terms of your loan will not change."

The bottom line

To sum it up, there are two important pieces of information you need to know if a bank fails while you have an outstanding loan with it:

First, you still owe the money. Your debt doesn't magically go away just because your bank does.

Second, the new owner of the loan -- either the FDIC or the acquiring bank -- must honor the original terms of the loan. In other words, it can't decide to make you pay the entire balance immediately, change your interest rate, or make any other changes to the terms.

If your bank fails, don't panic. You will receive information within a few days from the FDIC or whichever bank ends up acquiring your loan, and it will tell you where your loan payments should be directed going forward.