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CD Rate Cuts After a Bank Fails


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:

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Anonymous   |     |   Comment #1
Irwin Union Bank -  Acquiror reduced  CD ratesto 1.50%.  At the time, the CD rate on an original 48 month CD exceeded 5%. 

Arizona Community Bank - Acquiror, Mid-First Bank, retained a 3% rate on a 2-yr CD.

Umbrella Bank - as bad a result as with Irwin Union.

Advanta - obviously another horrible result.





John C
John C   |     |   Comment #2
BG, as you reported last year, when Mutual Bank of Chicago failed, they were taken over by United Central Bank, which proceeded to slash the rates for existing Mutual Bank CDs... despite one of Mutual's branch managers emailing me at the time saying their CD rates would remain unchanged thru their term. Of course, it didn't turn out that way...
Anonymous   |     |   Comment #3
American United Bank in Georgia: Americus Bank took them over and just closed out the CDs and put the funds in an account that yielded very little if anything.  Took me about 10 days to find out, and then had to go though documentation hassles to actually get a check.
Anonymous   |     |   Comment #4
Amendment to my posting at 8:39 about American United.  Ken did a post on the bank failure, but altho I read the blog every day, I managed not to read that notice, so all I got was a non-descript letter from Americus 10 days later -- I almost just set it aside as junk mail.  Now I am much more careful about reading all notices about closures, and scrolling through to be sure I have checked the names of all the banks.