FDIC Insurance

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Topic Author
sport
Posts: 9648
Joined: Tue Feb 27, 2007 3:26 pm
Location: Cleveland, OH

FDIC Insurance

Post by sport »

If a bank that has FDIC insurance should fail, the FDIC usually will find another bank to take over the accounts. If a depositor has a CD in the bank at the time of failure, is the new bank required to honor the terms of the CD, or can they refuse to pay the high rate and let the depositor just withdraw the money instead? If I recall correctly, during the S&L crisis some years ago, the failing banks often had CD rates that were above those of the more solvent banks. The new banks would not honor the terms of those CDs. While the depositors did not lose money, those with long-term, high-rate CDs did not earn what they expected. Am I correct on this, and is this still true? If so, this could be a good reason to avoid banks that appear to be in trouble, even if they are insured by FDIC.

Jeff
Chip
Posts: 3102
Joined: Wed Feb 21, 2007 4:57 am

Post by Chip »

I have the same recollection that you do, Jeff. Though I can't remember which banks were involved.
User avatar
NAVigator
Posts: 2457
Joined: Tue Feb 27, 2007 7:24 am
Location: Iowa

Post by NAVigator »

That is a very interesting question. I have searched the website and can't find the answer. I suspect the amount invested is protected, but not necessarily the terms of the CD investment. I just can't verify this.

http://www.fdic.gov/deposit/index.html

Best wishes,
Jerry
"I was born with nothing and I have most of it left."
User avatar
dm200
Posts: 23148
Joined: Mon Feb 26, 2007 2:21 pm
Location: Washington DC area

Interesting question ..

Post by dm200 »

There have been three recent bank/thrift failures of FDIC insured institutions. Maybe there is something there. My guess is that it depends on how the takeover was done. Sometimes the failed bank/thrift has a lot of value to the bank taking over (good customers, lots of growth opportunity) and sometimes the failed bank/thrift is a real dog. BUT - this is just a guess

http://www.fdic.gov/bank/individual/fai ... alley.html

http://www.fdic.gov/bank/individual/failed/NetBank.html

http://www.fdic.gov/bank/individual/fai ... tansb.html

dan
User avatar
nisiprius
Advisory Board
Posts: 42212
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Post by nisiprius »

I'm 99% sure that in during the S&L crisis, in real life, the banks that took over old accounts were not required to honor the old terms and in practice did not always. I'm sure I read newspaper stories about this. It was not a great big hairy deal, the differences were small, but enough for customers to be annoyed.

I think the problems tended to be more with fees and features then in raw rates, although I think that in least some cases the new interest rates were, you know, 1/4% lower, that sort of thing.
User avatar
nisiprius
Advisory Board
Posts: 42212
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Nope, they can be replaced at a different interest rate

Post by nisiprius »

I sent a query to the FDIC via their website, and received this reply. The gist is that "the new bank may not be required to pay interest at the same contractual rate that the failed bank was paying. If the new institution does not pay interest at the same rate as the failed bank, depositors would have the option to withdraw their funds without penalty."
Date: October 22, 2007
Ref No: SCC2007W-010255-0

Thank you for your question about FDIC deposit insurance payments.

The FDIC generally uses two different methods to pay insurance to depositors when a insured bank fails: (1) issuing a check to each depositor in the amount of his/her insured deposits at the bank, or (2) establishment of an new deposit account, equal to the insured balance in the depositor's account, at a new FDIC-insured institution.

The most common method is to provide depositors of the failed bank with a new deposit account (in an amount equal to the depositor's insured balance at the closed institution) at a new FDIC-insured institution. When this method is used, the new (acquiring) bank agrees to pay interest on the transferred deposits beginning the next day after the failed bank is closed. This method ensures that there is no interruption of interest payments to the depositors of the failed bank. While the new (acquiring) institution must pay interest on the transferred deposits immediately, the new bank may not be required to pay interest at the same contractual rate that the failed bank was paying. If the new institution does not pay interest at the same rate as the failed bank, depositors would have the option to withdraw their funds without penalty.

If you have would like to discuss your insurance coverage further, you may want to call the FDIC Call Center at 1-877-275-3342 Monday to Friday from 8 AM to 8 PM.

As part of our ongoing efforts to improve our service to the public, we would appreciate it if you would complete a short questionnaire on the level of service you received from this office. The questionnaire form can be accessed at: http://www2.fdic.gov/starsmail/customer.html.

I hope this information is helpful.

Kathleen Nagle
Federal Deposit Insurance Corporation
Division of Supervision and Consumer Protection
550 17th Street, N.W.
Washington, DC 20429
Topic Author
sport
Posts: 9648
Joined: Tue Feb 27, 2007 3:26 pm
Location: Cleveland, OH

Post by sport »

nisiprius,
Thanks for following up on this. That is the answer I would have expected. In your earlier post, you suggested that any interest rate difference would be small. That is probably true under most circumstances. However, consider the situation where a depositor is three years into a 6-year CD that was purchased when rates were much higher than those at the time of transfer to the new bank. For example, if you had an 8% CD and current rates were down to 5%, you would not be very happy about losing the last 3 years of that 8% interest rate. For this reason alone, I would not want to buy a high rate longer term CD in a shaky bank even with FDIC insurance. While the principle would be safe, the expected yield might be in jeopardy.

Best wishes,
Jeff
Post Reply