CD Strategies

Protecting Your Cash

Aug 12, 2008 - While only 90 out of 8,500 banks and savings institutions are on the Federal Deposit Insurance Corporation's (or FDIC's) watch list of potential troubled lenders, concerns and fears amongst depositors have swelled as they've watched distressed depositors line up in front of the latest banking casualty to be taken over by the Feds, most notably IndyMac Bank.  And while the FDIC insures depositor's (of participating institutions) checking, savings and CD accounts up to $100,000, approximately 38% of total deposits are not fully insured.  It has been reported that over 5% of deposits at Indy Mac were not covered by FDIC insurance.  For those depositors who are unsure as to whether their institution of choice provides FDIC insurance, they need only ask and look for the gold FDIC insured signs which should be plainly visible.  It is also suggested that depositors contact the FDIC directly to confirm their institution, as well as their personal deposits, carry the insurance; go to the FDIC's website  or call 1-877-ASK-FDIC.  The maximum amount of insurance per eligible account is $100,000 and for those depositors having accounts in excess of the limit, there are additional ways to obtain the needed coverage.  First, one could open a joint account which would cover joint tenants (spouses for example) on the account up to $200,000 or $100,000 a piece.  Secondly, one could opt for creating a revocable trust account which would require designated beneficiaries be assigned to the account and each eligible beneficiary (typically relatives within a nuclear family are eligible) would be insured up to $100,000 each.  Also it is important to note that the ceiling on FDIC coverage for retirement accounts is $250,000.

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For those fortunate among us who have hundreds of thousands to millions of dollars to protect, you may want to allocate your money over multiple institutions to be sure you are fully insured and protected.  To this end, you can place your vast amount of funds with just one of the more than 2,150 banks and savings institutions which participates in the Certificate of Deposit Account Registry Service (or CDRS, pronounced Cedars).   By placing all of your funds with a CDRS member, you can deposit as much as $50 million dollars with just one participating institution which will then allocate all of your funds deposited amongst other participating CDRS members so that all of your funds (up to $50 million) would be fully covered by FDIC insurance.  Approximately one quarter of all eligible institutions offer this service and the concept is that one institution will hold onto the initial $100,000 of the total funds deposited and then allocate the remaining funds up to the FDIC insurable limit of $100,000 into other participating CDRS institutions.  The depositor is not charged for the service but rather the bank or savings institution is assessed 12.5 cents per $100 of coverage applied.   

In 2003 the Certificate of Deposit Account Registry Service (or CDRS) was started as a way for small banks and savings institutions to compete on the same playing field as the large institutions when it came to the issue of deposit insurance. The smaller institutions believed they faced a competitive challenge from the larger institutions which were not forced to underscore deposit insurance to the same extent because they were deemed simply too large to fail and could conceivably count on a level of government assistance and support in the event they ran into trouble, which the smaller institutions could not. Consumers are in the position of selecting a smaller institution participating in the CDRS network and the service would then divide the funds into sums of under the FDIC insurable limit of $100,000 within their network of over 2,000 participants.  One rate of interest is established by the home bank and it applies to the entire portfolio and the depositor (or customer) receives one statement from the primary institution where the funds were initially deposited, detailing each account throughout the CDRS system.  No additional fee is charged to the customer for participating in the CDRS system however some banks may offset the transaction fees they must pay to participate in CDRS by providing slightly lower rates on CDs for CDRS accounts than non-CDRS accounts.  This is because the group which operates CDRS, Promontory Interfinancial Network, does assess an initiation fee to those institutions participating in the CDRS network as well as charging them a per transaction fee.  However many of the participating institutions will offer the same rates on CDRS accounts as they do on non-CDRS accounts.  In addition to the possibility of paying lower rates on customer accounts which are CDRS participants, other criticisms of CDRS include: the conservative nature of CDs and the opportunity cost involved to investors when more competitive investment options might be available to them as well as the concern that if a CDRS institution failed, money allocated amongst many institutions could be unduly tied up should the primary institution fall into receivership. 

Nancy Osborne, Nancy Osborne has had experience in the mortgage business for over 20 years and is a founder of both ERATE, where she is currently the COO and Progressive Capital Funding, where she served as President. She has held real estate licenses in several states and has received both the national Certified Mortgage Consultant and Certified Residential Mortgage Specialist designations. Ms. Osborne is also a primary contributing writer and content developer for ERATE.

"I am addicted to Bloomberg TV" says Nancy.


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