The Safest Online Banks: Is Your Savings Account in Jeopardy?

Written by nickel - 15 Comments

Given the recent failure of IndyMac Bank, I though I’d put together a quick rundown of the safety ratings of six of the most popular online banks. The following list is based on Bankrate’s “Safe & Sound” ratings* of the financial condition of their parents companies:

FNBO Direct - 4 stars
ING Direct - 3 stars
E*Trade Bank - 2 stars
HSBC Direct - 2 stars
Emigrant Direct - 2 stars
WTDirect - 2 stars

Note that there are two WaMu-related listings — Washington Mutual FSB (5 stars) and Washington Mutual Bank (1 star). Ken chimed in (comment #13, below) to point out that the latter one has the lion’s share of deposits, suggesting that it’s the “real” WaMu. Given this possibility, I’ve stricken it from the list.

Moving down the list, I was a bit surprised to see that ING Direct only rated 3 stars, as I had assumed they’d be very strong. To be fair, Bankrate says that the majority of institutions fall into the 3-4 star range, so this isn’t exactly a knock on ING.

We actually have a decent chunk of savings at both ING Direct and HSBC Direct, and I’m not losing any sleep even though HSBC has just a 2 star rating. After all, we’re safely below the FDIC insurance limits.

For the sake of comparison, the now insolvent IndyMac Bank currently rates just 1 star. I suspect that this rating is due, at least in part, to the fact that the scale doesn’t go any lower…

*Definition of ratings:
5 stars - Superior
4 stars - Sound
3 stars - Performing
2 stars - Below peer group
1 star - Lowest rated

Published on July 16th, 2008 - 15 Comments
Filed under: Banking, Online
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Comments (scroll down to add your own):

How exactly does Bankrate figure this out? From their site they:

“measure the capital adequacy, asset quality, profitability, and liquidity (CAEL) of each rated financial institution.”

I guess I’m just surprised to see a jump from 5-star first-place rating down to ING at 3 stars. What is Wamu doing that’s so special?
Comment by Jesse — Jul 16th 2008 @ 6:55 am
I would be careful. I used to have accounts at NetBank and they were a constant 2-star rated institution before they disappeared from the earth…

This is making me a bit nervous about my accounts at EmigrantDirect…perhaps return is not always a good thing to be chasing…
Comment by JohnS — Jul 16th 2008 @ 10:20 am
If you want a safe online bank, check out State Farm bank. Very safe, as parent company not in the subprime (or prime, for that matter) mortgage biz. Rates not the best, but they are OK. Also, check out Principal Bank; they exited the mortgage biz several years ago. We used to have checking / savings with them (we switched to WAMU when Principal sold them our mortgage), and we have a couple CDs with them.
Comment by cemccon — Jul 16th 2008 @ 10:25 am
Bankrate just takes the CAEL ratings and flips them around such that 5 is the best and 1 is the worst (for CAEL ratings, 1 is best and 5 is the worst). As you noted, the CAEL numbers are based on a number of financial indicators related to the solvency of the bank — do they have enough money? are their holdings sufficiently liquid? Etc. As for why particular banks fall out where they do, your guess is as good as mine. They don’t provide that level of detail.

Comment by nickel — Jul 16th 2008 @ 10:29 am
The nice thing about being not-rich is that I’m well below the FDIC limits.
Comment by deepali — Jul 16th 2008 @ 10:31 am
Out of all the banks on the list, I would be most worried about Washington Mutual since these guys are highly exposed to the mortgage fallout. It’s just a matter of time that this bank fails. Have you seen their stock lately? Exactly.
Comment by Alain Wong — Jul 16th 2008 @ 1:08 pm
I’m surprised to see WaMu rated first as well. As for my personal experience, I really like my ING account. Like you, I am also safely within my FDIC insured limits, so I just appreciate the excellent customer service, and don’t worry too much about it.
Comment by ConnieB — Jul 16th 2008 @ 2:32 pm
Be careful about the WAMU rating … there are really two WAMUs, one incorporated in Neveda, and the other in Utah. One has a five-star rating, and the other only a one-star rating. I’d be interested to know which is the ‘real’ WAMU? Check out http://www.bankrate.com/brm/safesound/ss_home.asp for more info, or to look up your own bank.
Comment by cemccon — Jul 16th 2008 @ 3:53 pm
I can’t imagine why WM would be number one in anything at this point. WM’s management has a lot to prove and fast. The company is teetering on the edge right now.

I would feel much better having an HSBC account than a WaMu account.

Yesterday I put WM in my top five list of banks that could fail.
http://hubpages.com/hub/Which-.....rouble-now
Comment by Aaron — Jul 16th 2008 @ 5:56 pm
This is an excellent blog. I have an online savings account, but my bank isn’t mentioned. I am going to have to look around for a bank to use with my business checking when I start my new business in a few months, so I am glad I caught this. Thanks!
Comment by Cindy @ Financial Tips — Jul 16th 2008 @ 8:14 pm
Something to keep in mind is the fact that different ratings agencies have posted different ratings for ING Bank — i.e., the USA bank dba ING Direct, chartered in Delaware, and the primary commercial US branch of ING Groep NV, the Netherlands financial giant. The FDIC’s website points people looking for bank ratings to AM Best, Bauer Financial, and Bankrate.com. Bauer gives ING Bank 4 out of 5 stars. AM Best doesn’t rank ING at all. Other ratings agencies, like Fitch Ratings and TheStreet.com, have ING Bank all over the place.

I’m an academic librarian, and I have access to a number of business databases. After reading today’s post, I went looking for articles in the trade journals about ING. This may be telling: there were a number of articles in the business/trade press about ING’s sitting pretty due to its avoidance of the subprime mess (for example, Fortune, 3/17/2008, “ING dodges subprime”). An article about safe places for your money in the August 2008 issue of Kiplinger’s Personal Finance recommends ING Direct (”When it comes to your cash, think safety”). And finally, ING Americas’ CEO, Thomas J McInery, recently gave an interview to the NYTimes (NYT, 04/19/2008, “When the focus is expansion, not subprime worries”) in which he said that ING had very little exposure to subprime and Alt-A lending, so any fallout due to the subprime mess was very limited where ING was concerned. Something I found really interesting is that “Credit Union Management,” a top journal for professionals in the credit union industry, has a couple of articles in its July 2008 issue that praise ING Direct for its simplicity of offerings, transparency and customer service (”Serving Main Street”; “ING Direct the new CU?”) — much like a credit union.

In short, the consensus in the business/trade press is that ING Bank is solid. Well, that some comfort, I hope …
Comment by PDamian — Jul 16th 2008 @ 10:25 pm
Is there a Rating List for Credit Unions ??
Comment by Donny Sherry — Jul 18th 2008 @ 12:20 pm
WaMu’s Bankrate ratings are confusing due to WaMu’s two FDIC charters.

Cert # 32633 based out of Henderson,NV has $184 billion in deposits and has a 1-star rating @ bankrate
http://www.bankrate.com/brm/sa.....1000508551

Cert # 33891 based out of Park City, UT has only $1.4 billion in deposits. This one has the 5-star rating @ bankrate
http://www.bankrate.com/brm/sa.....1000511905

So the main WaMu Bank appears to be the one in Nevada which has the 1-star rating.
Comment by Ken — Jul 21st 2008 @ 9:24 pm
About a ratings list for credit unions, Bankrate also provides the same ratings. Just select credit unions instead of banks at the bankrate’s safe and sound page

http://www.bankrate.com/brm/safesound/ss_home.asp
Comment by Ken — Jul 21st 2008 @ 9:26 pm
What a terrific site!
Thanks for the helpful,updated information on banks.
I have made changes.

Unfortunately, we have drifted into unchartered territory,there is no recovery.As with the climate,a page has been turned within the economic structure and we are into a chapter that no one’s familiar with.Any guess is as good as another and listening to educated experts can be financially devastating.
That being said,if it looks like a storm,then prepare for one.
Use common sense,we have it for a reason.
If your fortune is entirely virtual,then you have nothing.
Forget about penalties and taxes,they pale in comparison to a total loss and taxes “WILL”go up.

Have you seen the movie “Weekend at Bernie’s”?

See it,then you’ll have a good idea of what’s going on.

best of luck
Comment by Ray — Jul 23rd 2008 @ 12:14 pm