We’ve all learned a lot in the past few weeks about how the Federal Deposit Insurance Corp. protects depositors in the event of a bank failure, but there’s still some fine print that’s being sorted out. One lingering question has been about what happens to promised interest rates on certificates of deposit. Banking regulations protect principal, but there’s no specific guarantee for the extension of rates.
Now Flagstar Bank, which took over the assets of the failed Signature Bank of New York in March, has said in a statement that it will honor outstanding CDs for its Signature Bank customers.
“At Flagstar Bank, it will be business as usual for customers who hold certificates of deposit from Signature Bank. The annual percentage yield will not change and the maturities will not change. That applies to brokered deposits, too. It’s a seamless rollover from Signature Bank to Flagstar,” said Susan Bergesen, vice president of media and corporate communications at Flagstar Bank.
That’s good news for customers who are locked into long-term CDs at rates that are now running at more than 4% — and sometimes at more than 6% at some financial institutions.
“It is common that when a bank fails, the acquiring bank does not continue existing CD terms. Thus, existing CD holders could lose an attractive rate,” says Ken Tumin, founder and editor of bank account comparison site DepositAccounts.com. He notes that when a bank is acquired due to a voluntary merger without a failure, existing CD terms are typically continued until maturity.
In a bank failure, the FDIC promises that you will get your principal and interest through the date of closure, up to the applicable insurance limit for each deposit, which is $250,000 per account type. But that stops once the bank is closed and the CDs are cashed out. If another bank acquires the assets, the FDIC says, “the acquiring bank becomes responsible for re-establishing interest rates and beginning the accrual of interest after the date of the failure of the bank. The acquiring bank may change the interest rate on the acquired deposits.”
For a brokered CD, which is one purchased through a third-party institution like an investment firm at a preferred rate, you may have a delay in getting your funds back because there’s more paperwork involved. The FDIC has to coordinate with the broker and verify the CD, then it sends the insurance check to the broker, who “in turn is responsible for distributing the payment to the consumer, and that can result in further delays,” says the FDIC.
The caveat to this is that the depositor can get out of the CD without penalty and put their funds elsewhere if they want to. In today’s rate environment, that may not be a bad scenario, because you might be able to top the rate you got just weeks ago.