What if your bank failed the stress test?

This post comes from Jennifer Waters at partner site MarketWatch.

Consumers banking at one of the four financial institutions that did not pass the Federal Reserve's stress test probably shouldn't worry about their bank failing, but they should be concerned if their deposits there exceed federally insured limits.

"Theoretically, not passing doesn't mean that the bank is not healthy," said Dan Geller, the executive vice president of Market Rate Insights, which researches financial institutions. "It means that it did not meet the severe criteria set up by the stress test.

"As long as depositors stay within the insurance limit of $250,000 per person, per account, they are safe," he said.

At banks insured by the Federal Deposit Insurance Corp., those deposits in interest-bearing accounts will be covered if a bank fails. In addition, non-interest-bearing​ accounts have unlimited insurance. (Post continues below.)

On Tuesday, the Federal Reserve said that 15 of the 19 banks passed what are now regular checks of what the Fed calls "capital adequacy" of the largest U.S. banks. The four that didn't were Citigroup Inc., MetLife, SunTrust Banks and Ally Financial. All now have 30 days to resubmit capital plans to the central bank.

This is the third round of stress tests, which began in 2009.

The tests are to determine if the nation's largest banks have enough capital on hand should the economy take a "severe" turn, to keep money flowing by lending to households and businesses.

Severity, in the Fed's definition, has unemployment peaking at 13%, stock prices falling 50% and housing prices diving 21%, as well as major turmoil in European and Asian financial markets.

That's stark by even the darkest days of the recession. The jobless rate now stands at about 8.3%, dipping slowly since it peaked at 10.2% in November 2009.

The tests call for banks to carry capital that stands at 10.1% of assets, a robust level. In the Fed's doomsday scenario, it estimates that banks would suffer some $534 billion in losses in just two years, dropping that measure to 6.3%, which the central bank concedes would still be adequate.

Remember, too, that this is a worst-case -- and improbable -- scenario. "The supervisory stress scenario is not the Federal Reserve's forecast for the economy, but was designed to represent an outcome that, while unlikely, may occur if the U.S economy were to experience a deep recession at the same time that economic activity in other major economies contracted significantly," the Fed said in a press release about the results Tuesday.

"Those that didn't pass still were not shown to be insolvent. They were shown to be weak from a capital standpoint in an especially severe situation," longtime banking consultant Bert Ely told MarketWatch.

Now they will be under pressure to increase capital and not raise dividends, like Citigroup had hoped to do.

More than 400 financially unstable banks already have been taken over by the government since 2007. "The problems have been taken out of the system," said Ely. "This isn't to say that folks shouldn't be aware of the financial condition of their banks, but they should not put the success or reliance (of the bank) on the stress test," he said.

Community banks are also being tested, but the results have not been made public.

What you should worry about is how much money you have in individual accounts at FDIC-insured banks. The limit, which was set at $250,000 on interest-bearing accounts two years ago, is scheduled to expire on Dec. 31, 2013, though it's widely expected to be extended.

If an account exceeds this threshold, it's best to break it into separate accounts at separate banks.

The unlimited insurance for non-interest-bearing​ checking accounts is scheduled to expire this year on Dec. 31.

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