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What Happens When Your Online Bank Fails?

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 [3], 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 [4] 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 [5], SFGate [6]