With bank failures so common these days, it's important that CD holders know that the new bank that takes over is allowed to lower the interest rates on existing CDs. The old rates are guaranteed to remain in effect until at least through the day of closure. There are a few relevant details in this FDIC article, What If Your Bank Fails?
By law, the acquiring bank can lower the interest rate on your deposit account, but you also have the right to withdraw the money without penalty. Many closed banks had been paying above-market interest rates on CDs (certificates of deposit) and other accounts. If your bank fails and the deposits are acquired by another institution, the accrued interest on your account through the date of the closing will be paid at your same rate. However, after that date, your new bank has the right to reduce interest rates, subject to certain restrictions.
In particular, for CDs and other non-transaction accounts, the assuming institution cannot pay a lower interest rate than what it offers to its existing depositors for similar accounts. The assuming institution also must notify you of any changes it intends to make in the interest rate or other terms of your account.
Note, the last sentence of the first paragraph states that your "new bank has the right to reduce interest rates, subject to certain restrictions." The article doesn't go into details about those "certain restrictions."
When Will New CD Rates Be Communicated and Take Effect?
The recent failure of Darby Bank & Trust Co. last Friday is highlighting these issues for several readers who had Darby's Step-Up CD. A reader described many of the details that he was told by the FDIC in this comment. The main issue now for Darby CD holders is when will the acquiring bank inform customers of the new rates (if rates will be changed) and when will the new rates take effect. Here's an excerpt of the reader's comment based on his conversation with a FDIC representative:
According to the FDIC, until the acquiring bank has decided to change the terms, the OLD terms are in effect -- and while the acquiring bank can change the terms at any time, they CANNOT make the changes retroactive. In other words, Darby failed today, on a Friday. If the acquiring bank doesn't decide to change the terms until, say, Monday, then the accounts are still supposed to receive the old Darby rates for Saturday and Sunday (until the new terms have been decided upon). According to the FDIC, they can't go back and give you the new terms for Saturday and Sunday if they didn't decide on the new terms until Monday. However, the new bank could have decided to change the terms at 5:00pm on today (Friday), but customers won't know about it until Monday (the next time there's business hours).
I hope that's the case, but there have been cases in the past in which acquiring banks have been inaccurate and slow in their communications.
Complications When Acquiring Banks Change CD Rates
The closures of Corus Bank and Irwin Bank last year provide examples of how acquiring banks often poorly handle CD changes.
Here's one example in which customer service reps did not communicate the new rates. This comment is from a reader who had a CD at Irwin Bank which failed on September 18, 2009.
I find it interesting that I happen to call Irwin on the 25th to inquire about my CD and was told no decisions had been made yet. However, on the 28th, I receive a letter in the mail saying effective the 24th my interest rate is now 1.5%.
The other complication is that the acquiring bank can decide on different terms for different customers. So that could be the reason why some have reported that there will be no changes on their CDs and others have reported that their rates will be cut.
The acquiring bank may decide that they want to keep certain customers. These are likely customers who are in the market area and/or who have other relationships with the bank (such as a checking account). In short, the acquiring bank feels that these customers are more likely to be profitable for them in the future. Those customers who are not deemed as profitable, such as out-of-market customers, may have their CD rates cut or their CDs closed.
Here's an example of how an acquiring bank can decide on different terms for different customers. When Corus Bank was closed and MB Financial Bank took over, MB Financial decided to close CDs for most customers who lived outside their market area (Chicagoland). MB Financial Bank kept the CDs opened for those Corus customers who lived in Chicagoland. However, even they had their CD rates reduced.
We should soon know if the closure of Darby Bank will be another example of slow and inaccurate communications. For Darby Bank customers, please keep us updated in the Darby Bank closure post of your experiences.