When the FDIC arranges for a bank to assume the deposits of a failed bank, the acquiring bank is allowed by law to reduce rates on existing CDs of the failed bank. If they do reduce the rates, they are required to allow the customers to make a penalty-free early withdrawal. This policy is based on a federal law that was enacted in 1989 after the savings and loan meltdown. It was intended to prevent potential acquiring banks from being scared off by the high rate promises of the failed banks.
At the time a bank is shut down, the FDIC typically includes the following in its FAQ if another bank has assumed the deposits:
Interest on all deposits accrued through [Failure Date], will be paid at your same rate. [Acquiring Bank] will review rates and notify you if interest rates will change. Your interest rate may be reduced.
I've never seen these FAQs updated. To learn about what the acquiring bank decided requires some searching or help from readers who had CDs at the closed bank. Sometimes the acquiring banks will have these details on their websites. Sometimes newspapers will publish articles on the aftermath of the closures.
Another complication is that the acquiring banks don't always treat all customers the same. I've seen cases where customers who had checking accounts with the failed bank didn't experience rate cuts. However, those with only CDs had their rates reduced.
In short, it's difficult to track how many acquiring banks have reduced rates on existing CDs. It does seem more common these days in this environment of record low interest rates. Below are a few banks that have failed in the last couple of months in which the rate adjustments by the acquiring banks have been publicized.
Old Southern Bank in Orlando, FL: Failed on 3/12/10 and acquired by Centennial Bank. According to Centennial Bank's FAQ:
The rates on your Certificates of Deposit have changed to the current competitive rates offered by Centennial Bank
Orlando Sentinel article describes how this is affecting customers. Article mentioned a customer with a 4.70% 2-year CD that was set to mature in September. The article stated she was offered 1.30% on a new CD.
LibertyPointe Bank and The Park Avenue Bank both in NY, NY: Failed on 3/11/10 and 3/12/10 and both acquired by Valley National Bank. According to Valley's FAQ the CD rates changed on 3/19 with rates that range from 0.20% (that mature before 6/16/10) to 1.75% (that mature 9/16/12 and beyond).
Bank of Illinois in Normal, IL: Failed on 3/5/10 and acquired by Heartland Bank. According to Heartland's FAQ:
Interest rates on most CDs and IRAs will remain in effect until maturity. We will notify you in advance if the rate will be changed prior to maturity.
La Jolla Bank in La Jolla, CA: Failed on 2/19/10 and acquired by OneWest Bank. The Desert Sun received the following quote from a OneWest spokeswoman:
For the vast majority of accounts, OneWest is honoring interest rates, terms and conditions of the accounts as customers had with La Jolla
However, the article includes examples of rate cuts including a 5-year CD that had a 4.9% rate being reduced to 2.9%.
American Marine Bank in Bainbridge Island, WA: Failed on 1/29/10 and acquired by Columbia State Bank. According to Columbia's FAQ
Your maturity date on your CD(s) will remain the same; however, your interest rate(s) have changed
For the new CD rates, the FAQ pointed to the bank's current rate sheet. For a $10K balance, rates range from 0.81% for a 12-month term to 1.94% for a 60-month term.
If you had CDs at a failed bank, please leave a comment on what the acquiring bank decided.
Bank Failure References: