FDIC Ins & loans

I had a lender ask me this,
"If a customer has deposits and loans with the bank, and the deposits exceed FDIC coverage and the bank fails and the customer takes a loss, they may offset the loss against their loans?"

Interesting question, any takers???

I haven't run across anything like this in all the material I've read regarding FDIC coverage - but am also interested in knowing the answer to this one!

Don't know if this may fully answer your question, but it would be my understanding that the loans would be taken over by another bank so there wouldn't be an offset. This was a Q&A I read in an online article.

Q. If my bank closes, what happens to my money in deposit accounts that exceeds the insured limits?

A. You become essentially a creditor of the failed bank. You will eventually recover some of your money, but the amount can range anywhere from 40 cents on the dollar up to a full 100. Recovery of the money could take months. At IndyMac, there are an estimated $541 million in deposits of the total $19 billion that exceed the insurance limits.

I don't see how that could work. I mean, loans and deposits are separate unless the bank is using the right to offset.

The excessive deposits can be setoff against the loans owed the bank. So a customer with $140,000 on deposit, and a $40,000 loan, can have the loan setoff and the remaining $100,000 are insured deposits.

Knew I'd find this. http://www.fdic.gov/regulations/laws/rules/4000-6100.html

And from the brochure, "When a Bank Fails"

Borrowers
Either the FDIC sold your loan at closing or the FDIC has retained it temporarily. In either case, your obligation to pay has not changed. Within a few days after the closure,
you will be notified by the FDIC, and by the purchaser, as to where to send future payments. In the case of a delinquent loan, the FDIC will “set off” the loan against the borrower’s deposits (if any) before paying deposit insurance. In the case of a non-delinquent loan, the depositor might elect to “set off” the loan against his/her deposits in order to receive full value for any uninsured funds (i.e., funds in excess of the $100,000 insurance limit).

Take a look at this FDIC page:
http://www.fdic.gov/consumers/banking/facts/borrowers.html

Also, for more details, take a look at FDIC Opinion 91-11, at

http://www.fdic.gov/regulations/laws/rules/4000-6100.html

WOW, you guys are good, I bow to the gurus. Thanks.

I have another scenario. What if a $600,000 CD is used as collateral for a loan and the bank fails, what happpens to the collateral?

Bump

Bump Bump

How big of a loan? See Andy's previous post regarding offsets.