sbp
02-11-2002, 04:54 PM
U.S. Shuts 'Unsound' Internet Bank (http://www.washingtonpost.com/wp-dyn/articles/A48089-2002Feb8.html)
Too Many NextBank Borrowers Default
Federal regulators closed NextBank N.A., an Internet bank that has 1.2 million credit card customers, for "unsafe and unsound" financial practices.
The Office of the Comptroller of the Currency said NextBank had extended too much credit, given the amount of cash it had in reserve.
"NextBank's unsafe and unsound practices were likely to deplete all or substantially all of the bank's capital," with little prospect of turning things around without government intervention, the agency said in a news release.
NextBank was the first Internet bank to be closed by the government.
"This may affect some of the other remaining online-only banks and reflect poorly on them," said Robert Sterling, a senior analyst at technology research firm Jupiter Media Metrix. "It's not very fair, but it might have that impact."
NextBank Visa cards remain valid, Visa said, although the credit card company is discussing what will happen with the accounts in the long term. On the company's credit card Web site yesterday, the card application link did not work.
NextBank, a unit of NextCard Inc., didn't offer a full range of banking services such as checking accounts. Its business was limited to accepting deposits in the form of $100,000 certificates of deposit and issuing credit in the form of credit cards. It attracted steady business: NextBank has deposits of $554 million, which isn't much by conventional banking standards but is large compared with other Internet-only banks.
NextBank's problem, the comptroller's office said, was that it did not have policies in place to adequately protect itself should credit card customers default in large numbers, leaving the bank unable to repay depositors.
In the past two years, as the American economy has softened, that is exactly what has happened. More of NextBank's borrowers defaulted than the bank had expected.
"The bank's assets were of lower credit quality than initially projected in the bank's business plan," the comptroller's office press release said.
A spokeswoman for NextCard did not return a phone call seeking comment. In a prepared statement yesterday, the company said efforts to sell itself have been unsuccessful and that it will reevaluate its business strategy.
The bank is now under the control of the Federal Deposit Insurance Corp. Depositors who had $100,000 or less in NextBank will get their money back. Those who deposited more will get more than $100,000 back only if there is money left over after the company is liquidated.
Accounts totaling $29 million exceeded the $100,000 limit, the FDIC said. The agency also said it won't know how much the closing will cost the government until NextBank's assets can be evaluated.
NextBank was one of several banks that emerged during the Internet boom of the late 1990s that promised high interest payments on deposits and low fees by keeping expenses low. Instead of expensive bank branches, they centralized their operations and interacted with customers online.
"What they found is that it's only a certain type of customer who's willing to use a financial institution where they don't have branch access," said Moriah Campbell-Holt, an analyst with Gomez Inc., which evaluates financial services providers.
But NextBank's problems appear to be somewhat different. The firm was involved exclusively in issuing credit cards, she said, and its problems appear to have come from incorrectly calculating the risk of customer defaults, not an inability to raise funds.
The Nasdaq Stock Market halted trading of NextCard shares yesterday. The stock last closed at 14 cents a share. NextCard shares traded for more than $40 a share in 1999.
more linkage: http://zdnet.com.com/2100-1106-833007.html
Too Many NextBank Borrowers Default
Federal regulators closed NextBank N.A., an Internet bank that has 1.2 million credit card customers, for "unsafe and unsound" financial practices.
The Office of the Comptroller of the Currency said NextBank had extended too much credit, given the amount of cash it had in reserve.
"NextBank's unsafe and unsound practices were likely to deplete all or substantially all of the bank's capital," with little prospect of turning things around without government intervention, the agency said in a news release.
NextBank was the first Internet bank to be closed by the government.
"This may affect some of the other remaining online-only banks and reflect poorly on them," said Robert Sterling, a senior analyst at technology research firm Jupiter Media Metrix. "It's not very fair, but it might have that impact."
NextBank Visa cards remain valid, Visa said, although the credit card company is discussing what will happen with the accounts in the long term. On the company's credit card Web site yesterday, the card application link did not work.
NextBank, a unit of NextCard Inc., didn't offer a full range of banking services such as checking accounts. Its business was limited to accepting deposits in the form of $100,000 certificates of deposit and issuing credit in the form of credit cards. It attracted steady business: NextBank has deposits of $554 million, which isn't much by conventional banking standards but is large compared with other Internet-only banks.
NextBank's problem, the comptroller's office said, was that it did not have policies in place to adequately protect itself should credit card customers default in large numbers, leaving the bank unable to repay depositors.
In the past two years, as the American economy has softened, that is exactly what has happened. More of NextBank's borrowers defaulted than the bank had expected.
"The bank's assets were of lower credit quality than initially projected in the bank's business plan," the comptroller's office press release said.
A spokeswoman for NextCard did not return a phone call seeking comment. In a prepared statement yesterday, the company said efforts to sell itself have been unsuccessful and that it will reevaluate its business strategy.
The bank is now under the control of the Federal Deposit Insurance Corp. Depositors who had $100,000 or less in NextBank will get their money back. Those who deposited more will get more than $100,000 back only if there is money left over after the company is liquidated.
Accounts totaling $29 million exceeded the $100,000 limit, the FDIC said. The agency also said it won't know how much the closing will cost the government until NextBank's assets can be evaluated.
NextBank was one of several banks that emerged during the Internet boom of the late 1990s that promised high interest payments on deposits and low fees by keeping expenses low. Instead of expensive bank branches, they centralized their operations and interacted with customers online.
"What they found is that it's only a certain type of customer who's willing to use a financial institution where they don't have branch access," said Moriah Campbell-Holt, an analyst with Gomez Inc., which evaluates financial services providers.
But NextBank's problems appear to be somewhat different. The firm was involved exclusively in issuing credit cards, she said, and its problems appear to have come from incorrectly calculating the risk of customer defaults, not an inability to raise funds.
The Nasdaq Stock Market halted trading of NextCard shares yesterday. The stock last closed at 14 cents a share. NextCard shares traded for more than $40 a share in 1999.
more linkage: http://zdnet.com.com/2100-1106-833007.html