One of the great misconceptions people seem to have about banks is that the money you deposit is still “your” money. No, that money is now the bank’s asset, and the account holders are essentially creditors </hand-waving>. That provides flexibility, but it can also lead to massive problems when things go bad.

In the largest US bank failure in 14 years, internet banking pioneer NetBank filed for bankruptcy protection last Friday. As a result, the Office of Thrift Supervision and the FDIC closed NetBank, and ING acquired NetBank’s deposit accounts.

I am (or at least was) a NetBank account holder, but I had less than $100,000 deposited, so my full account value was insured. Others won’t be so lucky. The 1,500 people with more than $100,000 in their accounts will become creditors to the bank’s receivership.

I have known about NetBank’s souring finances for a while, yet I kept my NetBank account loaded with a non-trivial (for me) amount of cash. Why? Did I feel invulnerable? Was it supreme faith in the FDIC? Maybe a little of both.

The actual failure has snapped me back to my senses, and even though I didn’t get burned this time, you can be sure that I will be more proactive the next time around.