When a Bank Closes

I just learned that NetBank was taken over by the FDIC. What happens to people who had money in that bank, especially if they had more than the FDIC limits?

The NetBank case shows how well the Federal Deposit Insurance Corporation (FDIC) can work. The bank closed on Friday September 28 at 3 p.m., and customers continued to have access to their FDIC-insured money through debit cards, checks and ATMs the entire time. By 10 a.m. Sunday, September 30, the Web site was active again and customers had full access to their accounts.

The portion of depositors' accounts that were covered by the FDIC, plus 50% of their uninsured funds, were automatically transferred to ING Direct, which took over the accounts. Former NetBank customers continue to have access to their money and won't need to make any administrative changes. Their account history and records were transferred to ING Direct, any direct deposits were transferred automatically to the new bank, and they'll be able to use ING Direct's BillPay and other banking features -- much like when a bank merges. CDs remain locked at their original rates, and rates for savings, money-market and checking accounts will convert to ING Direct's current rates.

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Customers who had money that wasn't insured by the FDIC will receive a claims certificate from the FDIC over the next few weeks and can also call an FDIC claims person at (800) 323-6111. They'll need to wait to get any remaining money while the FDIC disposes of the bank's assets. But depositors take precedence over other creditors, and the FDIC will gradually make payments on a pro rata basis as they recoup money from NetBank.

This process can take a while. When the Bank of Honolulu was closed in October 2000, for example, customers received 65% of their uninsured deposits within a week, another 22.87% by January 2001, another 6.6% by May 2001, then three more payments of 3% or less over the next three years. By March 2005, they had received back 100% of their uninsured deposits -- four and a half years after the bank originally failed.

In many cases, the FDIC doesn't end up recovering the full amount of uninsured deposits. The average is 72 cents on the dollar over the past 12 to 14 years. Recent payouts tend to be higher because banks are now being closed earlier, says FDIC spokesman David Barr, before their troubles worsen.

This experience shows how important it is to keep track of the FDIC limits if you have a lot of money in one bank. NetBank had $2.3 billion in total deposits, of which $101 million were uninsured, in approximately 1,500 accounts, says Barr.

You're safe as long as you have less than $100,000 in one bank, and you might have higher limits depending on the types of accounts you have there. You have a $100,000 FDIC limit for single accounts, $100,000 for your share of joint accounts, and up to $250,000 for certain retirement accounts. Those limits are for each bank. If you have a lot more money, you can get more FDIC coverage by spreading your deposits among several banks. For more information, see the Are My Deposits Insured? page at the FDIC Web site.

If you have more than $100,000 in one bank, it's a good idea to check your coverage limits at the FDIC's Electronic Deposit Insurance Estimator or call the FDIC at 877-275-3342 (from 8 a.m. to 8 p.m. eastern time) with questions about your limits and to verify whether a bank is insured.

You can also look up whether the bank is insured by using the FDIC's Bank Find tool. For more information about the FDIC's coverage limits, see my column, Ensure Your Accounts Are Safe.

As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.