Consider Bank Safety With Brokered CDs
By manybanking.com Staff
Certificates of deposit (CDs) purchased through a broker are similar in many ways to traditional CDs. But one key difference with brokered CDs is that your broker's name, and not yours, is listed on the CD. While that won't affect the safety of your money, it could impact the amount of interest you earn if the issuing bank fails.
When a bank fails, the FDIC steps in to organize a sale of the bank's assets. Included in these assets are your brokered CDs and any other deposit accounts. "If another bank acquires the assets, then there's no problem," notes Philip van Doorn, a banking analyst with manybanking.com. "If the assets aren't acquired, you’ll have to wait a few weeks to get your money, after which you’ll need to find another place for a CD deposit."
The delay is longer when the assets in question are brokered CDs, as compared to regular deposit accounts. That's because with brokered CDs, the FDIC has to contact the broker (or brokers) for a list of their customers and deposit amounts related to the brokered CDs. With traditional CDs, your name and deposit information are already registered with the bank. According to van Doorn, a delay of four weeks to accommodate the exchange of information between the brokers and the FDIC isn't out of the ordinary.
Even though your money is still safe, that delay could cost you: your money is tied up and isn’t earning any interest. Moreover, when you do finally receive your money from the FDIC, the interest rates available for new CDs may be lower than what you had locked in previously.
So how can you avoid the hassle of a bank closure that ties up your money? Before you choose your CD (or CDs) from the list provided by your broker, research the financial security of the bank issuing the CDs. You can do this by checking out TheStreet.com's Banks and Thrifts Ratings Screener. Just enter the name of the bank and the state in which its headquarters are based and you'll receive an evaluation of the bank in the form of a letter grade.
Think twice about choosing a CD from a bank with shaky financials, even if they are offering the highest annual percentage yield, or APY. And though a positive rating can't guarantee that a bank won't fail, doing a little research will lower the odds that you'll get stuck with a bad bank.
When researching the various CD offers remember to consider other important factors, such as whether or not a CD is callable (meaning the bank can end the CD before it matures) and does it have a fixed rate. sbup has more on understanding the fundamentals of brokered CDs.
If you decide brokered CDs aren't worth the hassle, you can always do your own CD shopping at manybanking.com's CD section. Enter your ZIP code and search for the best interest rates from local and national institutions. For instance, residents of New York can earn an interest rate of 2.6% on a $500 12-month CD from Citibank (Stock Quote: C) or 3.0% on a $1,000 12-month CD from Nara Bank (Stock Quote: NARA). Or, with a little extra cash, residents can earn 2.5% on a $10,000 12-month CD from Bank of America (Stock Quote: BAC).