Tuesday, October 07, 2008

How safe are my bank deposits?

Run on the BankWith the global liquidity crisis in full force and many Americans worried about a "run on the bank," I started doing some research about protecting my bank deposits.

I came across some very well written articles and an innovative deposit security program called the Certificate of Deposit Account Registry Service® CDARS®.

Financial institutions can offer CDARS because they are members of a special network.

When you place a large deposit with a network member, that institution uses CDARS to place your funds into certificates of deposit issued by banks in the network. This occurs in increments of less than $100,000 to ensure that both principal and interest are eligible for full FDIC insurance.
One drawback to the convenience of CDARS is that you can miss out on higher CD rates offered by banks other than your own. If you're willing to do a little extra legwork, you could get around that by finding a bank in the CDARS network that you believe consistently offers higher rates and open an account with them specifically for CDs

Another factor is that banks pay a fee to join the network and then pay transaction fees. Some banks pass those costs on to CD buyers by reducing the interest rate, says Angela Baker, treasury officer at Allegiant Bank.

"We set CD rates every Tuesday and we've built in those transaction fees for CDARS. We reduce the baseline interest rate by 15 basis points across all maturities."

Pemberton says customers are willing to pay for the convenience.

"We price CDARS (interest rate) a little bit less than one of our weekly CD specials. The value with CDARS is the extended FDIC coverage. You're going to pay a little something for that. People have been very receptive; they understand the value."

Adding to CDARS value is the convenience factor of one consolidated statement from your bank detailing your CDs. But while you know exactly where your money is, the other banks don't know you by anything other than an account number. The only institution, other than your own bank, that sees your personal information is the Bank of New York, which handles the CD transactions for all the banks in the CDARS network, according to Jacobsen.
CDARS: Beat the $100,000 FDIC limit

Key Issues for Depositor:

The two key issues for me as a depositor are as follows:
  1. Minimum CD Term is 4 weeks, I would like shorter maturities available to create full CD length CD ladder.
  2. CD rates are dictated by the local bank where you physically make your deposit. Thus, you want to find the CDARS participant bank with the highest CD yield.
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