Wary Depositors Take Charge of Accounts

Despite the FDIC's $100,000 guarantee, many worry about access to money.
Despite the FDIC's $100,000 guarantee, many worry about access to money. (By Chuck Burton -- Associated Press)
By Nancy Trejos
Washington Post Staff Writer
Thursday, October 2, 2008

Days before Charlotte-based Wachovia became the latest bank to succumb to the financial crisis, Charlie Park, who lives near Williamsburg, decided it was time to cut ties with the institution that held his money for 11 years.

Last Thursday, as it became clear that Wachovia was in serious trouble, he withdrew the $1,200 he had in his checking account. He transferred half to an account at nearby C&F Bank and stashed the rest in an envelope in his freezer. He plans to use the cash quickly to cover expenses for his family of five.

"It'll be cold, but the money should be fine," he said.

It didn't matter to Park that the Federal Deposit Insurance Corp., an independent government agency, guarantees up to $100,000 per depositor per bank. Financial planners and industry experts said that layer of protection has done little to calm the nerves of consumers, even if they have only a few thousand dollars at stake.

But in their effort to protect their assets, many customers unintentionally contributed to the doom of two of the nation's biggest banks -- Wachovia and Washington Mutual -- and to further consolidation in the banking industry. In the 10 days before regulators shuttered Washington Mutual, its customers withdrew $16.7 billion.

Regulators and lawmakers are trying to prevent customers from pulling out even more money from the remaining banks. The FDIC, for instance, has launched an online campaign to explain exactly how its coverage works.

"When you see two major banks like Wachovia and Washington Mutual . . ., two industry banking powerhouses go down in a matter of a week's span, it's very unnerving for clients and financial advisers alike," said Greg Fernandez, a financial planner at Nations Capital Wealth Management in McLean.

There are no industry-wide numbers available, but experts said many customers were taking their money to smaller, local banks or to online banks such as ING Direct, which have the same FDIC protections. Others are dividing their money among several institutions or restructuring their accounts within one bank to ensure maximum coverage. Some are even dabbling in gold or foreign currencies, more volatile investments that have nonetheless performed better than the dollar. And some are simply keeping more cash at home.

"There's a lot of money being moved back and forth between banks all trying to get underneath the FDIC maximum," said Arkadi Kuhlmann, chief executive for ING Direct, where in- and outflows have doubled in recent weeks. "That's happening a lot, I think, throughout the industry."

Business has picked up at Arlington's Promontory Interfinancial Network, which takes customers' money and disperses it among CDs of up to $100,000 and parks it among any of its 2,400 member banks. Last week, the company had five times the transaction volume that it averaged per week in January, said Phil Battey, vice president of legislative and public affairs for the company.

To Patrick R. Riccards, a 35-year-old living in Falls Church, a safe and an online bank seemed a better option than Wachovia.

Shortly after California-based IndyMac became the first high-profile bank to fail this summer, Riccards and his wife moved about $90,000 out of three accounts at Wachovia, including one that contained the money he uses to operate his education-consulting company. They left a small amount in Wachovia, but the bulk went to ING Direct, where they had been keeping a small savings account for a few years. Riccards also keeps some cash in a safe and is considering investing in gold.

Because he had less than $100,000 in any one account, he knew his money was safe. But he worried that he would lose access to it, at least temporarily, if the bank went under. "You want to prepare for the doomsday scenario," he said. "For the average American, you're worried about the stability of your bank. We all have this 'It's a Wonderful Life' scene in our heads. We'll show up at the bank for money to pay for child care or send in a car payment, and the bank will say 'No, we have no money.' "

David Barr, a spokesman for the FDIC, said that is a misconception. If depositors have less than the $100,000 limit, they can still use their debit cards, write checks and withdraw money even if one bank is sold to another. "It's a very seamless transition," he said.

That said, banks don't fail often, he said. There are 117 banks on the FDIC's list of problem banks, the names of which are not made public. Each year, he said, only 13 percent of the problem banks go under.

Even customers who have more than $100,000 can find a way to get more FDIC coverage, he said, if they keep their deposits in accounts under different ownership categories. There are eight ownership categories, including single accounts, joint accounts, revocable trust accounts and employee benefit plan accounts. The FDIC has an online tool called the Electronic Deposit Insurance Estimator, known as EDIE, that customers can use to calculate their coverage.

Right or wrong, Park, who runs a budgeting service called PearBudget.com, isn't interested in all the FDIC rules. "With three small kids, I don't have time for filling out paperwork and getting my money back from a bankrupt corporation or from the government," he said.

© 2008 The Washington Post Company