In the largest bank failure since 1993, NetBank Inc., a 17-year-old online savings and loan company, filed for Chapter 11 bankruptcy at the end of September. The Federal Deposit Insurance Corporation (FDIC) insures deposit accounts (e.g. checking or savings) up to $100,000. Customers whose accounts contain less than $100,000 continue to have full access to their money, according to an FDIC statement.
But what about the 1,500 deposit accounts with balances over the $100,000 deposit insurance limit? These customers now face the potential loss of their uninsured funds.
Customers with accounts over the FDIC limit face losing their uninsured money
"While these customers will have access to their insured deposits, they will become creditors of the receivership for the amount of their uninsured funds,” according to an FDIC statement. “[T]he FDIC is in the position to provide each uninsured depositor with an [sic] dividend equal to 50 [percent] of your uninsured amount.” The remainder of these uninsured funds are contingent upon the liquidation of NetBank’s assets, and may or may not be recovered.
Though NetBank’s bankruptcy marks the biggest bank failure in 14 years, it is not the only failure to have occurred. It was preceded by the Metropolitan Savings Bank of Pittsburgh earlier this year, and the Miami Valley Bank in Lakeview, Ohio followed on Oct. 4.
Considering that the FDIC insures 8,615 U.S. banks, three failures in one year may not seem too daunting. However, in light of the subprime mortgage financial crisis and subsequent credit crunch, bank failure is a very real possibility, particularly for banks engaging in risky lending practices.
In the case of NetBank, failure occurred “primarily due to early payment defaults on loans sold, weak underwriting, poor documentation, a lack of proper controls, and failed business strategies,” according to a statement by the Office of Thrift Supervision. NetBank is not the first bank to have these problems, and it is doubtful that it will be the last bank to risk failure as a result. As such, investors would be wise to take some cautionary measures in order to protect themselves and their money.
Most, but not all, banks are insured by the FDIC. Investors can easily look up a bank’s status via the FDIC’s online Bank Find option. Also bear in mind that the fact that a bank is FDIC insured doesn’t necessarily mean that every account they offer is covered.
In order for investors to ensure maximum insurance coverage for their money, it would also be wise to keep deposits in any one institution below $100,000. Even if investors have multiple accounts below $100,000 with the same bank, their coverage will not increase unless the accounts are in separate account categories (e.g. single, joint, etc). Retirement investment accounts are typically covered up to $250,000, according to the FDIC.
If for any reason investors have to keep more than $100,000 with a single institution, they should be sure to select a large and stable bank in order to minimize risk. Try to avoid banks that originated, or invested in, a large number of subprime loans. Uncertain investors may be enlightened by a look at the bank’s stock price. The banks hit hardest were those heavily involved with subprime loans. Remember, too, that banks paying higher-than-average interest rates on their deposit accounts may be at greater risk of failure.
