Nov

12

E*tradeSo, it's finally come to this. The financial community is chatting seriously about the prospect of a run on a bank. E*trade Bank, specifically. From the standpoint of one who has an account with them (a modest sum, and it's not where my paycheck or regular savings goes) what are the ramifications for an insured bank failure or the bankruptcy of the bank holding company?

I will probably close my account (which is the fashionable thing to do), but strictly speaking, what is the timeline of events between a bank failure and the return of my insured funds via the FDIC? Does the FDIC encourage other institutions to assume the deposits? Do I just get a check? How long does it take? Do modern banks and thrifts have provisions to restrict or delay deposits in order to forestall a run? (I remember when I was a mere lad that my first passbook savings account had a notice on the deposit slips that the savings bank had a right to delay paying withdrawal requests for up to 90 days.)

On the topic of E*trade bank specifically, they went through a rapid ramp-up during which they paid among the highest rates of interest in the country, subsidized almost all of their routine fees, and had their customer service people pick up the phones promptly. Then, presumably when they reached some level of critical mass, all of the coddling ceased (a sort of bait and switch, I suppose). And hence, despite the convenient interface, we decided several months ago to move almost all of our money elsewhere.

ETFC


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3 Comments so far

  1. Don on November 12, 2007 7:51 pm

    The biggest bank failure in the US since 1993 happened a little over a month ago with the failure of Netbank. Generally other banks are willing to pay for the acquisition of the insured deposits as a cheap way to gain new customers and in this case the FDIC was able to get ING to take over the accounts and the web site. Although I wasn’t a Netbank customer, it seemed fairly seamless for those with amounts within the FDIC limits.

    Those who were foolish enough to have more than the FDIC insured limit were only able to recover 50% of their uninsured amounts and were notified that they were creditors of the remaining company, so chances are they won’t get any of the remaining money back.

  2. Gary Rogan on November 12, 2007 8:26 pm

    You might want to learn from what happened to NetBank which was quietly shut down a couple of months ago:

    http://www.msnbc.msn.com/id/21039715/

  3. Eric Newell on November 13, 2007 9:27 pm

    I am former FDIC bank examiner…

    Typically when a bank is closed (failed) it will close on Day 1 as the former bank (in this case E-Trade) and open up on Day 2 as a another bank, for example Bank of America. Netbank (an internet bank with several billion of deposits) failed earlier this year, and the insured deposits were assumed by ING Direct. In this case, if you have insured deposits, there really is no “wait” per se for your deposits. Unfortunately, if you have uninsured deposits, you become a unsecured creditor of the failed bank, whose assets go into receivership, If you are lucky, once all the secured creditors are paid, with assets being sold off from receivership, then depositors may get reimbursed. There are some banks failed in the nineties still in receivership, so this can be years.

    A run on a bank is quite possible and there are no regulations that protect against it. That is why it is management’s responsibility to have a through policy and contingent procedures for liquidity if there happens to be a run in the bank. Banks are “rated” through regulatory examinations on its liquidity policy and procedures.

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