What Happens to Your CDs When a Bank Fails?
A reader named John wrote in with the following question about what happens to a certificates of deposit (CDs) when a bank fails:
If a customer has a CD at a bank that fails, is there a risk that the account will stop earning interest until assets are purchased by another institution, or when the other bank takes over may it change the interest rate on the CD?
When a bank fails, the FDIC typically transfers the dead bank’s deposits to a new bank in fairly short order. Thus, unless you have a “brokered” CD (more on this below), there’s not much risk of extended downtime. It’s also worth noting that federal law requires the FDIC to pay 100% of your deposits up to FDIC insurance limits, including both principal and interest.
While the interest that you’ve earned to date is safe (assuming you’ve respected the FDIC limits), it’s quite possible that your rate will change. The reason for this is that the new bank isn’t required to honor the terms of the failed institution’s deposit agreements. The good news is that you’re not subject to early withdrawal penalties if you don’t like the new terms.
Two examples of CDs at failed banks
When NetBank failed in the fall of 2007, their deposits were transferred to ING Direct. In contrast, when the FDIC takeover of IndyMac Bank and turned it into IndyMac Federal Bank, they maintained the high CD rates that were being offered just before IndyMac’s failure.
Be careful with brokered CDs
As noted above, the situation is a bit different for “brokered” CDs, which are purchased through a third-party (such as a brokerage firm) instead of directly from a bank. In this case, the CDs are rarely passed directly to the new bank. Instead, the funds typically get wired back to the broker. This can take some time, however, as the FDIC has to first cross-reference the owners of the brokered CDs against the list of depositors at the bank to ensure that they don’t have other deposits at the bank that might push them over the FDIC insurance limits.
This brings up another point about brokered CDs… If you’re thinking about buying one, be sure you know where the broker plans to deposit your money. Otherwise, depending on the size of the CD and the amount of money you already have at a given bank, you might end up inadvertently exceed the FDIC insurance limits.
Published on August 8th, 2008 - 6 Comments
Filed under: Banking
email this article
- add to tip'd - stumble it - digg it - bookmark it
About the author: Nickel is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!
Related articles...
» What Happens to Your Mortgage if Your Bank Fails?» Escape Your Mortgage Due to a Bank Failure?
» SIPC Insurance Coverage: What Happens if Your Broker Fails?
» Risk-Free Banking
» NetBank Fails, Underscores Importance of FDIC Limits
» The Best of August 2008
» Flexible Spending Accounts Under Attack?
» Five Tips for Fighting an Audit
Was this article useful? Please sign up to receive our content via e-mail:
Great deals...
Readers’ choice...
Recent articles...
- Did Congress Make the Homebuyer Tax Credit Retroactive?
- Congress Extends $8000 Homebuyer Tax Credit, Adds New $6500 Credit
- Lending Club Update - October 2009 Performance
- How Much to Budget for Car Maintenance?
- Series I Savings Bonds Now Paying 3.36%
- Use Weight Loss Strategies to Get Out of Debt
- Weekly Roundup - Disney Shanghai Edition
- How to Save Money on Vacations
- Most and Least Reliable Cars - 2009 Edition
- Get 100 Free Trades from OptionsHouse Brokerage
Recent comments...
- Jay: Don't forget nCleaner 2nd for turning off widows firewall and windows defender...also use the...
- Bryan: @Doug - you said it... if you simply delayed the closing, it would have...
- Sympathetic Dish TSR: @ Bonnie: Is your HD tv a Flatscreen LCD style? If so then a...
- John DeFlumeri Jr: Thanks for explaining the tax credit. Too bad for those who purchase in...
- Hank: I always budget $100 a month for car repairs. I constantly find myself going...
- Karen: Because my income is commission based & way down this year, I'll qualify for...
- Eugene: To whom it may concern: I have an Aunt that passed away sometime ago and...
- Doug: This is RIDICULOUS!!!! We closed on our house on September 9th, so those of us...
Most talked about...
- Dave Ramsey is Bad at Math
- $8,000 Homebuyer Tax Credit
- Dish Network Customer Service SUCKS
- How to Claim the First-Time Homebuyer Tax Credit
- $15,000 Homebuyer Tax Credit
- Reduced Credit Limits? Share Your Experience
- Would the "Fair Tax" Gut the Economy?
- Tax Stimulus Rebate Payments to Start Early
- Pay Off Mortgage Early? Or Invest?
- The Best Online Savings Accounts (Updated!)
- Life's Too Short to Drink Cheap Beer
- $7500 First Time Homebuyer Tax Credit
I can provide first hand corroboration about the Netbank –> ING transfer. I had 5 CDs with Netbank that were transferred relatively quickly to ING. Soon thereafter I got a notice that the rate was going to change (go down, of course) and that I could withdraw my money with no penalty. It made sense to withdrawn 2 of the longer term CDs since I could find better deals elsewhere, but the shorter term ones stayed.
Comment by MITBeta @ Don't Feed the Alligators — Aug 8th 2008 @ 9:11 amHey Nick, do me a favor and prominently post the date on your blog entries. I find it useful to click on related past entries that you list at the bottom of your daily entries, but irritating that I cannot quickly tell when you wrote them. Some entries, like milk, have a “sell-by” usefulness date. Put another way, I want to know how “stale” your product may be before I invest my time to read it.
On another note, I had $103,500 CD at IndyMac Bank when it failed. It took until 8/8/08 for the FDIC to call and inform me that, due to the way I had the account configured (held within a trust with 4 beneficiaries), it was 100% insured. Even at that, I had to first send in an account-ownership-affirmation letter. So, I’m relieved. Even better, I can now liquidate the CD without penalty, or leave it there, with the 4.01% APY term unchanged, until its 10/20/08 maturity date.
Comment by Chris Desmond — Aug 9th 2008 @ 9:55 amThat’s a good thing to know that you can get the highest yielding CD out there and even if the bank fails, as long as you have less than $100k invested there you will walk away safely.
Comment by Dividend Growth Investor — Aug 9th 2008 @ 6:24 pmThe bank crisis certainly has people a little nervous. It will be interesting how this all shakes out.
Comment by Mark Nelson — Aug 11th 2008 @ 9:38 amThanks for the post. I think it’s important for people to understand and not to cause a panic by going to the bank and taking out money on any little rumors.
Comment by BankAround — Aug 11th 2008 @ 11:01 amThis post rings true for me- I bought an IndyMac CD at 4.35% the DAY before it failed. I received a statement in the mail over the weekend, and sure enough, I’m earning my interest. I’m comforted knowing that should another bank come in and take over the assets of the new IndyMac Federal Bank, I will have the option of withdrawing my funds if they propose a lower rate. Until then, I’m safely earning the highest yield out there.
Comment by #1HB4DB — Aug 13th 2008 @ 9:34 am