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.

8 Responses to “What Happens to Your CDs When a Bank Fails?”

  1. Anonymous

    I had to give additional collateral In the form of a CD to secure a loan for the purchase of my business building in 2006. The bank subsequently failed in 2010. I got a letter stating that my depositor agreement was no longer in force that they were resetting my interest rate much lower. Since it was pledged as additional collateral for the loan, I was told could not take it out or move it to another bank. is this correct?

  2. Anonymous

    What happens if the last parent (mom) just passed away,
    left a envelope in safty deposit box at
    wells Fargo, brother (POD)for Wells Fargo only, got things out, gave to me (sister) in envelope a Certificate of deposit for my brother and myself, BUT!Her name is on it,it just states what it is and who its for on the front of envelope The bank closed in Oct of 2011, FDIC took over..Is there a clause in these CD’s for Rules and Regulations that is chosen by depositor to pay upon death? to son and daughter? She did not leave a will..But we are benificaries to the Property (home/land)everything is split equally..Will this apply to the CD also? When FDIC finds the funds!!!

  3. Anonymous

    This 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.

  4. Anonymous

    Thanks 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.

  5. Anonymous

    That’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.

  6. Anonymous

    Hey 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.

  7. Anonymous

    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.

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