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Risks with a CD When a Bank Goes Under

If you keep your deposits under the FDIC limits, you shouldn't have to worry about losing any money if your bank fails. This includes interest if the combined interest and principal remain under the FDIC limits. There is one risk described in this Bankrate article for those with CDs. A Bankrate reader asked if ING Direct (the receiver of Netbank's deposits) was obligated to continue the terms of his Netbank CD that was scheduled to mature next February. Since interest rates had fallen, he was happy with the rate of the CD and wanted to wait for it to mature. However, ING Direct closed the CD. Apparently, the receiver of a failed bank has no obligation to continue the account terms of the failed bank. So when a bank fails and the deposits are acquired by another bank, your existing CD essentially becomes a callable CD that can be closed by the new bank at any time. The Bankrate reader mentioned that ING Direct claimed it closed the CD for security reasons, but you have to wonder if it closed the CD so it wouldn't have to pay the high interest rate.

So when interest rates are falling, you may want to consider the health of a bank if you're wanting to purchase a CD, especially a long-term CD. If you open a 5-year CD at 5.00% and the bank goes under after one year, the receiver bank may decide to close the CD. At that time, you may be lucky to find a 3% CD. You would have been better off choosing a 4.50% CD at a healthy bank that had much less risk of failing.

On the other hand, a bank failure could be advantageous if rates are rising. ING Direct allowed Netbank customers with CDs to close them without any penalties.

Bank failures have been so rare before Netbank in the last few years, that this analysis may be a waste of time. However, with the current credit crisis, we may see many more bank failures in the year to come. So it may be something worthwhile to consider.

For more information on Netbank's closure and comments of many readers who had Netbank accounts, please refer to my follow-up post on Netbank's closure.

Also, for information on the FDIC and NCUA deposit insurance, please refer to the following posts: Extending FDIC/NCUA insurance over $100K and Facts about FDIC/NCUA.

Resources to review the health of banks and credit unions:

Latest financial data of the banks and credit unions are available via:
Related Pages: Netbank, San Diego, Las Vegas

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Anonymous   |     |   Comment #1
The analysis is indeed very useful, seeing as both Countrywide and IndyMac have been issuing CDs with very tasty APYs.
Anonymous   |     |   Comment #2
I had a 1 year Netbank CD due to mature next summer. ING Direct did not close my high-rate CD, even though their current rates are lower. It's still running strong with the old rate with ING.
ShraZZy   |     |   Comment #3
You forgot to mention if they actually pay you the interest up to the date of the closure when it chose to close it early
procol   |     |   Comment #4
I mentioned this very issue on a thread at Fatwallet. Didn't seem to impress the locals very much.

And as you point out ,the longer the term, the more 'risk' you are taking should the bank fail and you have to reinvest at a poor rate.
Mike   |     |   Comment #5
I wonder if dollar amount had a factor in ING's closing of certain CD accounts. I had a smaller $15k CD w/Netbank that wasn't closed by ING.
Weiwen Ng
Weiwen Ng   |     |   Comment #6
if rates were rising, I wonder how eager an acquiring bank would be to close the CDs it acquired.
Anonymous   |     |   Comment #7
Here's a complaint that I have to believe is not unique. About four years ago, my wife and I both opened up five-year CDs at NetBank. A condition for doing so was each of us opening a $2,000 checking account.

Now, however, ING says that while it has a record of the CDs, it has no record of the $2,000 checking accounts. Since we have no intention of making a $4,000 gift to ING, we will be sending them the wire transfer records, showing the $4,000 transfer.

Anybody else have this problem?

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