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CD Strategy That Depends on Bank Failures

I've focused on listing deals from banks that are not too weak. However, some may be more interested in deals from weak banks. One CD strategy that I've seen some readers mention is to search for high rates on long-term CDs at weak banks. The goal is to get a high CD rate that may last for 6 to 12 months before the bank is seized by regulators. At that time, the FDIC will typically sell the failed bank to another bank which often allows CD depositors to close their CD without penalty. The result is that you received a long-term CD yield on what turned out to be a short-term CD.

The first important thing to note about this strategy is that it depends on you keeping under the FDIC coverage limit. If that is done, your FDIC-insured deposits are safe if the bank fails. Not only is your initial deposit safe, but also all accrued interest up to the day of failure.

The other issue to consider is that it's impossible to know how close a bank is to failure. The FDIC keeps its problem bank list secret. You may get some ideas by looking at the safe and sound ratings and at the recent public enforcement actions. At DepositAccounts.com we now provide the Texas ratios and other health metrics for banks and credit unions. We also have a link to the Bankrate page which provides its own health measure for the bank. In addition, we include public enforcement actions with links to the regulators' documents. You can search for the bank or credit union using the search box on the right sidebar.

If you are considering this strategy, there are some potential issues that could make this strategy less appealing:

  1. Not all weak banks may be offering the best rates. If a bank is considered less than well capitalized, it may be subject to the FDIC's deposit rate caps.
  2. The bank may not fail. In that case you might be unexpectedly stuck in a long-term CD.
  3. The bank mail fail too soon. In that case the extra interest you had earned may not have made up for the extra work
  4. The acquiring bank may decide not to lower the CD rates. If there is no change to the CD, you may not be given the option for a penalty-free withdrawal. This is what happened when Chase acquired WaMu.
  5. It may take a week or more to receive your money after the bank fails, and during this time you may be earning little if any interest. If another bank acquires the failed bank, it can immediately change the interest rate after the day of closure. That interest rate may be very low, and it may take them a week or more before they provide you with the CD options
  6. If the FDIC can't find a buyer, they will then mail you the check for your insured deposits (both principal and accrued interest up to the day of failure). That check typically takes at least a week to arrive in your mail box during which time you'll earn no interest.

Have you had success using this strategy? Or has it been more problems than it has been worth?

It's up to you if you think this CD strategy is worthwhile. It might be tempting if weak banks were offering CD rates over 4.00%, but in today's environment, the extra interest rate that you may earn on this strategy may not be worth dealing with the above issues.

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Anonymous   |     |   Comment #1
Lets not be naive with the CD rates. The difference between a less capitalized bank and a 5 star bank is very small, less then a point on most CD rates.
If a bank fails, there is a danger of delayed payments and canceling of interest paid on some accounts. FDIC for sure will send cease and desist letter if a bank try to be creative and above the allowed rates publish by FDIC and circulated among the banks.
Let say you are lucky and get few extra bucks of higher rates for few more months or until the bank is closed.
The difference in amount received is small compared to a solid bank and by the time you receive and re-invest the money at another bank, will wipe out the profit made at the lower quality bank.
It is not worth to even consider such money moves if the uncertainties are greater then a solid night slip for a  minuscule gain.

Anonymous   |     |   Comment #2
Probably a moot issue anyway, I can't find a 4% CD yield for any maturity anywhere in the country. If anyone knows of one, please post.  I sense the regulators are less tolerant of weak banks shoring up their asset base with higher than market rates.
Anonymous   |     |   Comment #3
What about ally and 60 day penalty.

I don't think you can beat that and their rates.
Anonymous   |     |   Comment #4
It is a big mistake to buy ANY long term CDs at this time.  We will almost certainly enter high inflation within a few years, and your money will become worthless.
Anonymous   |     |   Comment #5
Thanks for posting this strategy, Ken.  Not saying I'll jump on it.  But I want to be aware of all  strategies.  And this is one I had not previously thought of.  You can't have too many tools in the shed these days.  It's pretty tough out there right now, and things are not going to become better any time soon, IMHO.
Anonymous   |     |   Comment #6
Look what we have become, begging  the banks for couple percentage  points to pay on our money.
Miserable  and low is not enough to  characterize our situation.
No  offense Ken, but that is not worth  our time and frustration to  monkey around the pitiful interest rates.
Bite  the bullet  and go with the flow, the strategy of chasing rates is over.  Very  soon we will have to pay the banks for keeping our money save.
Anonymous   |     |   Comment #7
Anonymous   |     |   Comment #8
Just received a notice from First Michigan Bank who took over failed Citizens First about my 22 mo CD with an APY of 3.11 that has been reduced to 1.35.  I can close it without a penalty but it will cost me $5.00 for a cashier's check and even more for a wire transfer to obtain the funds.  Something to consider when opening accounts with weak banks.