by Lee R. Phillips
Here’s a little PS on the bank rating information previously posted.
Several years ago, I shopped for the best rates on a CD investment I had. I picked a coupe of banks that offered great rates (for the time anyway). Funny thing-both of the banks I picked were the first to go under when the banking crisis came. They were immediately bought out by bigger banks and everybody was happy. However, I got burnt to a small degree.
You need to pay attention. The banks “on the edge” are the ones that offer the higher CD rates. They need to raise capital desperately, and to get money in the door, they offer the best rates. In addition to checking out the bank’s rating (see instructions in my previous blog) you can also see if the bank has had any enforcement actions issued against it by the Feds. Usually, before the bank fails the Feds will try and change its risky behaviors by issuing enforcement actions against it. Go to www.FDIC.gov to find enforcement actions against your bank.
Changing Rates
When a bank “buys out” a failing bank, the new bank can, and usually does, lower the interest rates on CDs held by the failing bank. You have the right, without penalty, to move your money at that point. They aren’t going to notify you that your rate is changing, so you need to keep checking.
Insurance Limits
Your CDs are insured up to $250,000 today for IRAs. The insurance limits are going to drop in the next few years, so watch that. You can get an estimate as to your coverage by using the EDIE calculator at the FDIC site. (www.FDIC.gov/EDIE)
You are absolutely right. Unusually high yields could be a sign of a bank that is not financially solid. However, these days, even banks with low yields are going under. Like you said, check out the bank’s financial soundness ratings to be better informed of its health.