NextBank, NA Fails: What Does It Mean for Your Institution?
By Mary Beth Guard
NextBank, NA's Failure: What does it mean for you?
In a move that took most banking industry professionals by surprise, the Office of the Comptroller of the Currency closed Internet-only bank NextBank, NA on February 7, 2002. After no successful bidder emerged to assume the failed institution's assets and deposits, the FDIC, as receiver, announced it would continue to evaluate the bank's assets and would mail checks to insured depositors within the next few days.
What does this mean for other financial institutions? Unfortunately, 5.3% of the bank's deposits were uninsured. The attendant publicity is likely to spark questions in the minds of your customers about how deposit insurance coverage works, how quickly they would get paid in the event of the failure of their own institution. Since NextBank, NA was an Internet-only bank, its failure might also raise questions about the safety and wisdom of online banking.
Become familiar with the forms the FDIC is making available for to complete on certain accounts. They state that f you have funds in an account known as payable on death (POD) account, revocable trust or in trust for (ITF) account, one of the forms is required.
Interestingly, as of 5:45 p.m. central time on the day of the closing, NextBank's Web site was still up with no messages that would alert a surfer that the bank is no longer open for business. With its Internet-only presence, it's like the doors weren't really closed. While in a real-world bank closing the first thing the regulators do is post signs at every entrance to the bank noting that it has been closed, the virtual doors on this one remained open and undisturbed for a period of hours after its failure. Perhaps the regulators' closing procedures had not been revamped to include closing doors in cyberspace. At any rate, they soon rectified the problem. By 6:57 p.m. central, the cyberdoors had slammed been shut and the FDIC had posted a message saying "FDIC Information for NextBank, N.A., Phoenix, AZ -- On February 7, 2002, NextBank, N.A. was closed by Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) was named Receiver. No advance notice is given to the public when a financial institution is closed. The FDIC has assembled useful information regarding your relationship with this institution. Please select the link below to read more about this event."
At a time when so many financial institutions are having a difficult time attracting deposits due to uncommonly low interest rates, it is somewhat surprising that no one was able to strike a deal with FDIC to assume the deposits. Undoubtedly, in the coming months we'll get answers to questions about
-- the nature and substance of the institution's deposits -- whether they were true core deposits or "hot" money from brokers;
-- what caused the institution's failure -- whether it was old-fashioned mismanagement, fraud, overwhelming technology costs, unsafe or unsound practices, Internet security breaches, or simply bad loans.
Several class actions had been filed against NextBank's parent, NextCard (NASDAQ:NXCD) in recent months, alleging financial reporting irregularities relating to the NextBank subsidiary. The misleading statements concerned NextCard's repeated descriptions of NextBank as well-capitalized in its SEC filings. The lawsuits allege that NextBank was in fact significantly undercapitalized and that NextCard maintained this false ``well capitalized'' status by improperly classifying credit losses as fraud losses. See a collection of news stories dating back to November 1.
Stay tuned. This is a historic failure and the story has just begun to unfold. For a peek at what NextBank used to look like, do a search on Google using "NextBank" (without quotes) as your search string. Then click on the option "cached" in the search results. How could so much go wrong so quickly?
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Interestingly, as of 5:45 p.m. central time on the day of the closing, 