Wesabe members have been asking a lot of questions about the financial industry news in the US today, and how it might affect consumers. The situation today is a huge amount better than it was in the 1930s-era photo above, as a result of changes to the financial services industry after the bank failures of the Great Depression. Still, it’s good for consumers to be informed and to be safe with their money using some simple precautions. I tried to get some official answers, and then also talked to a customer who had all of his funds in NetBank, a bank that failed and was acquired by ING Direct last year, and have some advice based what I’ve found.
In general, US banking customers are protected by the Federal Deposit Insurance Corporation (FDIC). From the FDIC web site, here is a brief description of what protection is provided for FDIC-backed institutions:
An independent agency of the federal government, the FDIC was created in 1933 in response to the thousands of bank failures that occurred in the 1920s and early 1930s. Since the start of FDIC insurance on January 1, 1934, no depositor has lost a single cent of insured funds as a result of a failure.[…]
Savings, checking and other deposit accounts, when combined, are generally insured to $100,000 per depositor in each bank or thrift the FDIC insures. Deposits held in different categories of ownership – such as single or joint accounts – may be separately insured. Also, the FDIC generally provides separate coverage for retirement accounts, such as individual retirement accounts (IRAs) and Keoghs, insured up to $250,000. […]
The FDIC insures deposits only. It does not insure securities, mutual funds or similar types of investments that banks and thrift institutions may offer.
As long as you have less than $100,000 in a deposit account, then, and your bank is FDIC-backed (you can find out if it is here), then your funds are protected. There’s a lot more practical information and detail at the FDIC’s “When a Bank Fails” page.
(It’s a good thing the FDIC has a fairly comprehensive web site. I called them today to talk through some of the questions I’ve heard from Wesabe members, and they said today was the biggest day of call volume they ever remember having, and asked me to call back later. Today’s financial news has definitely brought a lot of people to the FDIC with questions.)
What really happens, though? I spoke with a Wesabe user who had almost all of his funds at NetBank at the time it failed last year. ING Direct acquired NetBank, so he was able to get access to his funds through that new account once it came online. His experience was instructive:
- For two to three weeks after NetBank closed, he had “no real access” to his money. At the time, he had all of his liquid funds in NetBank accounts, so in order to get by, he relied on his parents and his fianceé, and a couple hundred dollars he happened to have in his wallet when the bank failed.
- He got one note from the FDIC saying that NetBank was failing, and after that, all of his communication was with ING Direct. (He had less than $100,000 in his accounts, so all of his funds were protected.)
- The first message from ING Direct said (paraphrased), “In a few days, you’ll get read-only access to your account so you can confirm the funds are present.” As he put it, “Oh, great, a web page with some numbers on it. When can I actually get that money!?”
- He had direct deposit set up to his NetBank account, and had one direct deposit payment “vanish into nowhere.” He had to get his employer to resend that payment to his new ING Direct account. (Note that the FDIC site says this won’t happen.)
- Several automatic payments from his NetBank account were not processed, but since he was able to get the new ING Direct account set up within a few weeks, there was no real harm from this.
- Overall, the experience was a big shock. “If I didn’t have very, very nice parents and a very, very understanding fianceé, I’m not sure what I would have done,” he says. He now has accounts at three separate banks in order to provide better access in the time of a crisis.
(Thanks much to this former NetBank customer for providing so much information for us.)
In many senses, the NetBank failure was the best possible scenario, since a well-funded and -equipped bank immediately acquired the accounts. Of the 38 bank failures since 2000 FDIC currently shows on its Failed Bank List, 34 of them resulted in the failed bank’s accounts being acquired by another bank. While the FDIC delivers insurance checks to consumers in the event that no other bank acquires the accounts, promises to do so “as soon as possible,” and says payments “usually begin within a few days after the bank closing,” I could imagine that situation might be even more stressful and confusing, since an acquiring bank is probably better-equipped to handle new customers’ service issues. I would be especially concerned if these sorts of acquisitions became impossible because the failing banks became too large, or failures too widespread.
So, looking at the FDIC guarantees and one Wesabe member’s experience with a bank failure, what should consumers do to protect themselves? My advice:
- Never keep more than $100,000 in any deposit account. If you have more than that much to save in deposits, distribute it over several different banks.
- If you maintain an emergency financial fund (which is always a good practice), consider housing it at a separate institution from your primary account.
- Always keep essential deposit accounts at FDIC-backed institutions.
- Check your bank’s stability using Bankrate’s “Safe & Sound” ratings, or another rating system if you prefer.
- As part of a standard home emergency kit, keep some cash in the house in a safe place — several hundred dollars, if you can. Storing your savings in your house doesn’t make sense, but having some cash to get you through in the event of any kind of trouble — bank trouble, natural disaster, or otherwise — is smart.
- Be an informed consumer! Keep up with the financial news, and of course we believe Wesabe Groups are a huge help as well. Financial topics are overwhelming and can be hard to follow, but the more you learn, the better-off you’ll be.
Hope this helps. I’ll be talking about this topic tomorrow night on CNBC’s “On the Money” personal finance show, with host Carmen Wong Ulrich. If you have questions you think we should cover on the air, leave them below or drop me a line at firstname.lastname@example.org.