About Ken Tumin

Ken Tumin founded the Bank Deals Blog in 2005 and has been passionately covering the best deposit deals ever since. He is frequently referenced by The New York Times, The Wall Street Journal, and other publications as a top expert, but he is first and foremost a fellow deal seeker and member of the wonderful community of savers that frequents DepositAccounts.

Featured Savings Rates

Popular Posts

Featured Accounts

Inflation Dangerous Banks - Those That Could Refuse CD Early Withdrawals


Inflation Dangerous Banks - Those That Could Refuse CD Early Withdrawals

An important concern with long-term CDs is having your money locked into a low-rate CD when interest rates are shooting up. It's unlikely that we will see interest rates shoot up in the near term, but it becomes more likely with growing budget deficits and increasingly easy monetary policies. Conditions like that could lead to higher inflation, and that could force the Fed to raise interest rates.

I'm sure many readers remember the late 70's and early 80's when the Fed Chairman Paul Volcker raised the federal funds rate to 20% in June 1981. That helped to bring inflation down from its peak of 13.3% in 1979 to 3.2% by 1983 (source: NYT). I remember my parents in the early 80's purchased a 10-year CD with a 16% APY. When it matured, the value was over 4x of the original principal.

Over the last six years I've seen many comments from readers who say they would never lock into a long-term CD due to the above fears. It should be remembered that there's another risk: rates keep falling or stay low. That is what has been happening over the last four years. I remember in 2007 when a lot of people chose FNBO Direct's 6.00% savings account instead of PenFed's 6.25% long-term CDs. Why lock into a long-term CD when you can have a liquid savings account paying almost the same rate? Today the FNBO Direct's standard savings account rate is 0.70%.

Even though rates may continue to fall or stay low, there is a risk that rates will eventually shoot up. If rates do rise like they did in the early 80's, you won't want to be locked into a long-term CD paying today's extremely low rates. However, if the CD has a reasonable early withdrawal penalty, it should be easy for the depositor to do an early closure of the CD, take the penalty and reinvest the money into accounts with the new higher yields. There are two potential gotchas to this approach that we've discussed many times:

  1. The bank refuses to allow an early withdrawal
  2. The bank increases the early withdrawal penalty on your existing CD

I consider the first risk to be the more worrisome. The increase of an early withdrawal penalty is possible as we learned with the Fort Knox FCU case. However, an institution is required by regulations to provide affected members with a written change-in-terms notice at least 30 days before the effective date of the change. At least that gives us a chance to deal with the changes. If the institution is making a big increase in the penalty, customers should be able to close the CD before this change takes effect with the original early withdrawal penalty.

The risk that a bank refuses to allow an early withdrawal is more worrisome since it totally locks the depositor into the CD until maturity. There have been cases of banks refusing an early withdrawal. In my 2008 blog post, I reported on the experience of Chris at Jumbo CD Investments. He remembered two cases in which a bank refused to release funds. In one case, the bank ended up working with him and his client. They were able to have the bank release the funds after negotiating a higher penalty. The other bank would not budge, and it refused to release the funds.

Banks have little reason to refuse early withdrawals in today's environment of falling interest rates. If rates start rising, banks will have more incentives to refuse especially if rates rise substantially.

Banks That Are More Likely to Refuse

If you are concerned with being locked into a CD, it makes sense to avoid banks and credit unions which include in their disclosures a clause that gives them the right to refuse an early withdrawal. Unfortunately, several banks and credit unions do have clauses in their disclosures which give them the right to refuse an early withdrawal. Some common clauses that I've seen will include language like "only with the consent of the bank" or "if we permit an early withdrawal of principal".

I've reviewed the disclosures of several banks and credit unions. I identified those that include this type of language that gives them the right to refuse an early withdrawal. I also identified those which I did not find this language. Note, it's possible that I missed the clause so it doesn't guarantee that these "good" banks won't refuse an early withdrawal. However, I consider these to be less likely than the ones which have these clauses.

Inflation Dangerous Banks and Credit Unions

I'm calling these "inflation dangerous" since their CDs could be dangerous if we see high inflation and rising interest rates. The danger is being stuck in the low-rate CDs if the banks make use of these clauses in their disclosures. In addition to listing the banks and credit unions, I'm also listing the links to their disclosures and excerpts of these clauses. Please note, banks and credit unions often update their disclosures, and the new disclosures may remove these clauses. That happened recently at iGObanking.com as I documented in my last iGObanking.com CD review. So make sure you check with the bank or credit union for the latest disclosures.

  • AIG Bank - disclosure: "Withdrawals from a time deposit prior to maturity or prior to the expiration of any notice period may be restricted."
  • Bank of America - disclosure: "Except as required by law, withdrawal prior to maturity will be permitted only with the consent of the bank which may only be given at the time of withdrawal."
  • Fort Knox Federal Credit Union - membership agreement: "Withdrawal of the principal amount of your Certificate may be made only with the consent of the Credit Union."
  • OneWest Bank - Disclosure statement: "If we permit an early withdrawal of principal, we may impose an early withdrawal penalty on the amount withdrawn as follows"
  • USAA Bank - disclosure: "Any withdrawals before the maturity date require Bank's consent."
  • U.S. Bank - disclosure: "Except as required by law, withdrawal prior to maturity will be permitted only with the consent of the bank which may only be given at the time of withdrawal."

Note, I only included banks and credit unions in which I could link to an online disclosure with the clause restricting an early withdrawal. If you know of other banks or credit unions with such a clause that's not listed, please leave a comment with the name of the bank and a link to the disclosure.

Inflation Friendlier Banks and Credit Unions

There are a few banks and credit unions with disclosures that explicitly state that early withdrawals of principal is allowed. For example, Northwest FCU has the following clause "you may make withdrawals subject to the early withdrawal penalties stated below". However, most banks and credit unions have disclosures that neither state they may refuse an early withdrawal nor state they will allow an early withdrawal. I've included some of these below. Please note that I don't take into consideration the size of the early withdrawal penalties or if there is any clause that gives the bank the right to increase the penalty on existing CDs. Also, please be sure to check with the bank or credit union for the latest account disclosures.

Other Resources for CD Investors

Related Pages: AIG Bank, Philadelphia, Bank of America, Fort Knox Federal Credit Union, Louisville, Lexington, OneWest Bank N.A. (Pasadena, CA), Los Angeles, Palm Springs, San Diego, USAA Bank, San Antonio, CD rates

Related Posts

Anonymous   |     |   Comment #1
How does one get a disclosure about early withdrawal before opening the CD?

Paoli   |     |   Comment #2
I would ask what it is and have it emailed to me.  If it is a local bank, I would go in and ask to see a copy of their Early Withdrawal Penalties.  I make no bones about telling banks I hope never to have to do an EWP but that I don't buy a CD unless I get to see the "written" terms first!  The way many banks are skunking us these days, it is obvious, they, are only thinking about numero uno.  So we have to make sure we do the same.

Thanks Ken for all the work and trouble you go to to try to keep us aware of what to expect with banks and credit unions and how to protect ourselves.  It is so good to know we have "someone" on our side!
Paoli   |     |   Comment #3
I would like to add a note about why "I" will but longer term CDs (after checking for good EWPs) even when everyone is telling me not to lock in for possibility for rates going  up.  About 5 years ago I remember reading all the financial guras were yelling "go short on Cds! Rates may go up!"  I know how much income I need for my family so if I can get a certain rate for a 5 year CD, I will lock in rather than "hope" rates will go up.  My CDs are getting ready to mature and I would have been in deep dodo if I had not locked in those rates against what I was being told.  Now, of course, I have the problem again soon and rates are still low.  However, I will do what I have to do to find that "one" bank or CU which will give me the rate "I" need for my use.  We all have to do what "we" need to do to survive, imo.
Paoli   |     |   Comment #5
Oh Goody!  Free booze!  So glad you are back and slosshing everyone with free whatever it is you imbibe!

Everyone but me that is.  I have to stay alert to find those 6% CDs!!  Welcome home me blokes!
B A T P   |     |   Comment #6
Who said it was free  a pint of guinessd aka mothers milk is going for 15 euros these days  thats beer for you tea  drinkers
Anonymous   |     |   Comment #7
Here is a better idea.  Go on strike.  Don't buy CDs!  Anyone holding long-term CDs is going to be wiped out.  Bernanke already admitted that he intends to continue to **** savers.  QE3 is going to be implemented as soon as they manage to attack the speculators enough such that oil and other commodities get hit hard.  Once that is done, the printing presses will turn on full force.  On again, off again, printing is being done to try to avoid hyperinflation, but it won't work.  Even if it did, all you will recieve from that success is financial repression instead of hyperinflation.

Anywhere and everywhere, inflation is a monetary phenomenon, and the American money supply has more than tripled from about $800 billion to close to $3 trillion since 2008.  Inflation, of course, is not a linear phenomenon.  The currency can take a lot of abuse before hyperinflation occurs.  Take a look at this chart of a 233 year period in the Roman Empire which corresponds to America since 1788.  During the last 80 years of the chart, the Romans began to debase their coinage, just like America.

Rome steadily removed the silver from its Denarius coinage, until the coin was mostly made of base metal.  The USA began prohibiting private gold ownership in 1933, and it also went off the gold standard that year.  It removed all silver from metal coins in the 1960s.

America and Rome have, so far, followed almost exactly the same path, with percentage inflation levels almost identical, at identical points on the time axis.  At this point in time, we are about to enter hyperinflation, assuming the correlation continues to be almost 1 to 1, as it has been for the 78 years since 1933.

Here is the URL for this important chart:  http://www.zerohedge.com/sites/default/files/images/user5/imageroot/images/TR%203.jpg

ChrisCD   |     |   Comment #9
Ken, thank you for the mention. 

The real problem would be making the bank own up to their original agreement.  The regulators (FDIC, NCUA, etc.) don't enforce contracts which are what CDs basically are.  They insure the deposits against institutional failure.

So if a bank or credit union breaks their contract, only a lawsuit would be able to get it corrected.  And banks and credit unions with much deeper pockets will be able keep you at bay for an extended period of time.  They may even have insurance that pays their legal bills.

A saving grace may be the fact that the same tellars that tell you, you won't have any problem closing your CD are often the same people that would be handling the closures.  Many of them may  not realize the bank could refuse to close it, and thus allow the CD to be closed without problems.

I do believe that most banks will honor closure requests and believe buying longer-term CDs is still a viable option.  However, I would not invest all my funds using this method for the simple fact that a bank could refuse the closure request.
LisaPA   |     |   Comment #10
Inflation is not a concern. You and others have been predicting runaway inflation for a few years now and though it still hasn't happened, you keep pounding away on that one note. What does it take to convince you you're wrong? Today's economic situation is nothing like the 70s, so comparing now to then is apples and oranges. The deficit should in fact be increased while rates are so low to get the economy moving again. If you could borrow at less than 1% to make needed home repairs, wouldn't you? So should our government.