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What Happens When Your Online Bank Fails?

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Did you have a NetBank account? If so, you don’t anymore because it’s now an ING Direct account. Yet another casualty in the subprime “end of the world” crashing of the financial markets doomsday perfect storm [insert random disaster comment here], regulators shut down the bank because of mortgage defaults. While I don’t have a Net Bank account, I have two online bank accounts (Emigrant Direct and ING Direct) so this one “hits close to home” (so to speak).

So what happened? As you might remember, the Federal Reserve has a reserve requirement where you must have on hand a certain percentage of your deposits. If you have $2.5B in assets and if the reserve requirement is 10%, you must have $250M on hand by law. However, the other 90% can then we borrowed out in numerous forms, which is what NetBank did. The problem then is if you lend out the 90% and then the loans start defaulting, which is what happened at NetBank. Due to excessive mortgage defaults, the Office of Thrift Supervision, which is part of the Department of the Treasury, shut down NetBank, named the FDIC the receiver, and ING bought all the deposits. Apparently, this problem preceded subprime (they apparently were very sloppy and not very good) and subprime did them in.

Now what? Well, first review the failed bank information on the FDIC website, that will give you more answers that you’ll probably need. Then, enjoy your new home over at ING Direct and decide if that’s where you would like to continue your banking. Thankfully, if you have less than $100,000 in deposits at NetBank, FDIC insurance covers you entirely. If you have an IRA, that’s covered up to $250,000. If you have more than that, the FDIC will send you a “Receiver Certificate” and then you’ll be given a proportion, depending on how much can be recovered from NetBank. If you do have more than $100k, you will have to speak to a Claims Agent and fill out a bunch of forms.

What about operations? I’m surprised to read this but everything goes on as usual. From the FDIC website, “You may continue to use the services to which you previously had access, such as automatic teller machines. Your checks will be processed as usual. All outstanding checks will be paid against your available insured balance(s) as if no change had occurred. … If you have a problem with a merchant refusing to accept your check, please contact ING DIRECT at 1-866-327-4599. An account representative will clear up any confusion about the validity of your checks.” Given how quickly the government usually responds to events like this, I’m surprised that everything is as seamless as the document makes it sound.

Moral of the story? Ensure you’re under the FDIC limit because you have to jump through far more hoops and you put your deposits at risk when they’re over $100k.

This is the first major bank to fail or get shut down since I’ve been paying attention.

Source: Consumerist, SFGate

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8 Responses to “What Happens When Your Online Bank Fails?”

  1. KM says:

    I have, or had, a checking account with NetBank, and other than being unable to access the website this weekend, there has been no affect yet on my situation. Website is now back up, account looks good and I used bill pay this morning. This week will be the critical test to insure everything is as seamless as they imply with checks cashing and other debits off the account. I was well under the $100,000 limit so I was not worried about losing the money but was concerned about any hassle that may be involved. Netbank was in an agreement to be bought entirely by Everbank, but it fell through a few weeks ago because Netbank was unable to come up with some of the cash necessary to close the deal. Given than ING Direct and Everbank jumped in so quickly to pick up the remaining pieces of Netbank, it must have been obvious the ship was sinking and they were prepared to incorporate Netbank customers as soon as possible.

  2. AJB says:

    I agree with KM and also was a long-standing NetBank customer. I have had no problems and was also under the $100K limit, so essentially, other than a 48 hour shut-down (and some serious nervousness) of the NetBank website, it was like a mild hiccup. I talked to an ING Direct representative today and basically, everything is fine. We have 60 days to decide whether or not we want to be ING Direct customers and can continue to use all NetBank features in the meantime (i.e. paper checks, direct deposit, automatic drafting, bill pay, wire transfers, etc.) as well as log-in to the usual NetBank system. For now, it is like nothing even happened!

    Just glad I didn’t have over $100K in the account, which case I would have had to stand in line with other creditors and who knows how long it will take for these folks to get a portion of the excess back…

    This was a wake up call for me even as someone who follows the subprime situation. This is definitely just the tip of the iceberg and anyone reading this is advised to look into their bank and consider having more than one account in case one of their banks goes under. Remember, this was a bank with $2.5 billion worth of assets, not a mortgage broker or “subprime only” outfit.

    I now feel confident that the U.S. will undergo one or more major old fashioned “bank runs” like in the U.K.

    Planning to keep a larger stash of cash under the mattress despite dollar depreciation, just in case the whole system collapses temporarily!

  3. Rob Carlson says:

    My uneducated hunch is that ING may be one of the next to go. I get an awful lot of ARM postcards from them. Something has to be propping up those big interest rates they offer, and it can’t just be low overhead. Imagine if they ever drop their savings rate by a percentage point or so. The exodus of money from their customers into other banks will measure as a Category 5 hurricane.

  4. phil says:

    I, too, had a couple of depository accounts with Netbank. I noticed they were originally going to hand the accounts over to EverBank after I saw Netbank’s stock completely tank.

    Because my family’s finances are shared in common accounts, my wife naturally become quite concerned and wondered about the efficacy of using a purely online “institution” — even if FDIC-insured.

    So, from the point I noticed the EverBank consideration, I immediately began looking at other banking alternatives (this especially because of the fact that any kind of transition would require an ABA/checking account number change-over). My wife wanted some form of “bricks-and-mortar” convenience and we both wanted good rates and no potential for fees.

    We found our new banking home and I hope the remaining Netbankers do well with ING or with whomever else they wish to engage in a banking relationship.

  5. jim says:

    I don’t think you should ever keep all of your finances in an online account of any kind, whether it’s a brokerage or a savings account, because circumstances beyond your control could limit your access to those funds. It could be as simple as the website being down and you having no way to call them to transfer your funds. I always like the comfort of having some funds in a brick and mortar bank just because I know that I can get myself there physically. If I can’t get myself to a bank physically, then an online bank won’t help me anyway.

  6. Netbank Fool says:

    I was Netbanks biggest fans over the past 5 years, but unfortunately I ultimately ended up with the short end of the stick. Of my 4 netbank accounts, one of them is around $30-40K over the FDIC insured limit. Going through the process now to try to recover what I can. Is it possible that it’s all gone? Does this really happen in the US?!?

  7. FatLady says:

    Interesting.

    I’m curious: why would you keep more than 100 grand in a bank, knowing it’s not FDIC-insured and given the rates that even the highest-paying banks pay? Or even anywhere near that much. I mean…if you’re going to risk losing it, wouldn’t it be better to put it in a mutual fund holding stocks? My Vanguard funds all return upwards of 8 percent, which is surely better than any bank pays. I don’t understand the logic of holding more than an emergency fund in bank accounts–at most, the net amount you’d need to live modestly for six months or a year.

    The U.S. is part of a global economy now. Has been for quite a while. That means our money’s no safer than anyone else’s, no matter where it’s stashed. And if you doubt we’re well on the way to becoming a third-world country–at least for everyone who’s not a member of the Richistani–spend six or eight hours trying to get medical care at your local hospital’s emergency room…maybe after you’ve cooked your hamburger rare. Or call the police and tell them someone’s trying to burgle your home. All those qualities and privileges that we as Americans imagine distinguish our country from the rest of the world are going away, folks.

  8. Curtis says:

    I was a NetBank customer, but only to get $150 in bonuses. I was planning to close the accounts after six months anyway, and only had $500 plus two months of interest when the FDIC closed it down.

    I’ve received a few e-mails from ING at this point. I already have an ING account, and I’m happy with it, so all in all, things seemed to have worked out okay for me.


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