I was searching for some Atlanta local news this evening and I came across something I wasn't looking for. It seems that as of 3PM today the Federal Deposit Insurance Corporation FDIC and the Office of Thrift Supervision shut down a local bank which is Internet based and has no physical branches. The name of the bank is Netbank based out of Alpharetta Georgia, and it has over 2.5 Billion in assets, and over 1200 employees. It is the largest bank closure by the FDIC in 14 years. The last closure of a major bank by the FDIC was in 2001. The reason cited for tha banks closure was excessive levels of mortgage defaults. Unlike some recent failures of mortgage companies, the one thing that is different here was this was a Federally insured Bank! Under current FDIC guidelines, depositors with deposits under 100K will be protected. Netbank has a total of 109 Million is deposit accounts that exceed the covered 100K limit.
When you really think about it the scenarios are much deeper than the news we read and hear each day. Persons with savings and cash presumed there was safety in the safe haven of a Federally insured bank now find out their savings are not so safe. These were probably not risk takers, These persons were not flipping homes, or betting on real estate doubling in 2 or 3 years. They assumed they were playing it safe! Those that avoided risk in stock investments, and real estate thought their money was in the right place, a bank! However, once they placed their personal savings and investments into the bank the bank then makes money on the spread by lending to others. A spread is the difference between what in placed on savings, and the interest paid on what is loaned. This works fine when everyone is playing by the rules. The higher the presumed risk, the higher the rates charged to that client. However there are real risks with the higher interests! Sometimes, it may be wiser not to lend what cannot be repaid!
Risk occurs when the bank does not do their job correctly. If the money is too loosely lent without supervision or sub prime risky borrowers without finding out how well are the borrowers are qualified? The lender really needs to know if the borrower have the ability to repay what they borrowed. If they do not...that is where the trouble begins! This isn't too smart to lend money out that is all risk! This is especially true if it your money they are lending out! That does not bode too well if the loans were made to a sub-prime borrowers when perhaps the lender of the loan was too lax with their lending standards or supervision with your money. When this happens everyone suffers, lenders, depositors, borrowers, home owners, local and national economy and taxpayers... who's government agencies have to come to the rescue. In 2003 100% of NetBank's assets were real estate. That is out and out suicide!
In an updated note because this is a breaking news story the FDIC made some futher announcements.