Posts Tagged ‘CD’

FDIC Insures Principal, Not Interest

October 15, 2010

No one has ever lost a penny on bank deposits insured by the Federal Deposit Insurance Corporation (FDIC), but there is a little-known hazard of having money in a failing bank.

Recently the Maritime Savings Bank (based in West Allis, Wis.) was closed by regulators and taken over by North Shore Bank. Depositors were informed that the interest rates on their CDs had been slashed. For some, that meant the interest on a CD that doesn’t mature until next spring will be paying about 0.5%  instead of the 3.05% they signed up for a couple of years ago.

Many people are unaware that this is typical when the deposits and assets of a failed bank are sold by the FDIC to a strong institution. Although banks and regulators often remind consumers that FDIC-insured deposits are safe, the promised future earnings on a yet-to-mature CD at a failed bank are not guaranteed. (The ability of an acquiring bank to unilaterally cut interest rates applies only to deposits, not loans.)

Consumers are free to withdraw their money without incurring a penalty, but in today’s low-interest environment it may be hard to find higher CD rates. In part, that’s because many banks that get in financial trouble try to attract money by offering CD rates that are better than the local competition.

In a decision stemming from the savings-and-loan crisis in the late 1980s, the federal government allows banks that acquire failed competitors to lower the interest rates. At that time many institutions that were doomed to fail boosted their CD rates in an attempt to bring in more deposits and stay afloat. When they failed anyway, the FDIC was left with a bigger and more-costly mess to clean up.

Reducing the rates on CDs makes the acquisition more affordable for a bank that steps in. It also makes it more likely that the FDIC will be able to find a strong institution willing to take over an insolvent bank.

If you are interested in more details about this story, read the complete article found on jsonline.com.