Bank Failure Law and Legal Definition

A bank failure is the inability of a bank to meet its credit obligations. A bank may become insolvent or too illiquid to meet its liabilities. A bank failure occurs when the market value of its assets declines to a value less than the market value of its liabilities. A failure can occur when a government agency takes over a bank due to decrease of capital ratio below the regulatory minimum.

Banks need not give advance notice of a failure. The Federal Deposit Insurance Corporation’s(FDIC) insurance protects a customer from bank failure. At the national level, the Comptroller of Currency can decide to close a bank. In the state level, the state banking commissioner closes a bank. The FDIC settles any claims against a bank by its creditors.