September 28, 2007 / 9:11 PM / in 10 years

UPDATE 2-US regulators close NetBank but ING steps in

(Recasts, adds details, ING and ABA comments, background)

By John Poirier

WASHINGTON, Sept 28 (Reuters) - U.S. bank regulators shut NetBank Inc NTBK.PK on Friday but said the Internet bank with $4.8 billion in deposits and assets remaining would reopen with online rival ING Bank taking over most of its operations.

NetBank had suffered large losses in 2006 due to defaults on loans, many of them mortgages, a government official familiar with the matter said.

The Federal Deposit Insurance Corp said customers of the failed Alpharetta, Georgia-based bank, which did not have any physical branches, can access their money over the weekend by writing checks and using teller machines or debit cards.

All NetBank customers’ insured deposits were transferred to ING Bank, owned by Dutch bank ING Groep NV ING.AS.

ING agreed to pay a premium and take control of $1.5 billion of NetBank’s insured non-brokered deposits and buy $724 million of liquid assets, the FDIC said.

The last time an Internet bank failed was in March 2002 when NextBank NA, which was based in Phoenix, Arizona, folded with $700 million in assets.

NetBank was the largest bank to fail since 1993 when Western FSB of Marina Del Ray, California collapsed with $3.8 billion in assets.

“NetBank sustained significant losses in 2006 primarily due to early payment defaults on loans sold, weak underwriting, poor documentation, a lack of proper controls, and failed business strategies,” the U.S. Office of Thrift Supervision said in a statement.

An FDIC notice on NetBank’s Web site said normal online services would resume on Sunday evening.

“People are basically going from one FDIC-insured bank to another,” Arkadi Kuhlmann, chief executive officer of ING Direct, which operates ING Bank, told Reuters by telephone.

He said the transaction will add 110,000 new customers to ING Bank’s 6 million customers. ING Bank has $60 billion in deposits and $78 billion in assets, making it the 4th largest savings bank, or thrift, in the United States.

BANK INDUSTRY SAYS SYSTEM HEALTHY

Two weeks ago, EverBank Financial Corp, a privately-held bank, pulled out of a deal to buy much of NetBank’s assets. On Friday, EverBank said it acquired about $700 million of NetBank’s mortgage assets.

Earlier this month, British mortgage lender Northern Rock NRK.L had to be rescued with billions of dollars by the Bank of England to survive turmoil in the credit markets.

Thousands of Britons lined up to withdraw savings from Northern Rock and the run on the bank stopped only after the government guaranteed all deposits.

Seeking to allay any U.S. consumer fears over NetBank, a bank industry group said the American financial system is “extremely healthy” and money in bank deposits is safe.

“The FDIC insurance fund is huge,” the American Bankers Association said. “The expected (NetBank) losses only amount to two-tenths of one percent of the fund.”

The FDIC said customers who exceeded its insurance coverage -- which amounted to $109 million in 1,500 NetBank deposit accounts -- will also become creditors of the receivership.

The FDIC has a $100,000 insurance limit on typical accounts, with a $250,000 limit on IRA retirement accounts.

The FDIC’s insurance fund exceeds $50 billion and can be tapped to help deposit customers. It also will allow those customers to access 50 percent of uninsured deposits.

“Since we began insuring banks in 1934, not a single depositor has lost a penny of insured deposits,” FDIC Chairman Sheila Bair said in a statement. (Additional reporting by Dan Wilchins in New York)

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