Jumbos just aren't worth the risk right
note: In April 2006, FDIC deposit insurance coverage
on retirement accounts held at banking institutions
was raised from $100,000 to $250,000. Non-retirement
account FDIC deposit insurance coverage remains
has been much attention given to the free fall in
yields on cash and fixed income investments this
year, and the impact it's having on the interest
earnings of investors.
Less noticed has been the fact that the same trend
exists on jumbo money market and certificates of deposit as well.
Jumbos are deposits requiring a minimum deposit of $100,000.
Due to the $100,000 FDIC-insurance limit on any given
account, jumbo products often carry a slightly higher yield to compensate
investors for the risk of loss on deposits exceeding the $100,000
threshold in the event the bank fails. To begin with, this is a
very unlikely scenario. Just four banks nationwide have failed in
2001. But in an environment where Americans are concerned with taking
less risk in and out of the investing arena, it bears pointing out.
In times such as this, where credit standards are
tighter, institutions need not compete so aggressively for funds.
The spread between jumbo and regular yields has narrowed considerably,
in some cases disappearing altogether.
Is this a distortion created by looking at averages?
Not exactly. In this week's Bankrate.com national survey, a nearly
equal amount of institutions (42 percent) offer higher yields for
jumbos as offer the same yield (41 percent) for regular and jumbo
In fact, some even offer a lower yield on jumbos than
on regular CDs, whether due to a promotional offer on regular deposits
or as a matter of pricing policy. Either way, call it "subtle
Why, in an era of a potentially increasing number
of bank failures, should an investor expose a portfolio to a risk
for which they will not be compensated? Fortunately, some alternatives
Investors can set up separately titled accounts holding
smaller amounts at the same institution (individual, joint-with-spouse,
etc.) instead of plunking the entire sum into one jumbo account.
For some, however, this may not be either feasible
or desirable. The next choice involves making deposits at multiple
institutions, keeping total principal and interest under $100,000
at each. On the surface this may be quite unappealing, but spreading
money around doesn't necessitate sacrificing yield.
Check out Bankrate.com's highest yielding deposits.
The spread between regular and jumbo yields is minimal here, as
well. And, a number of different institutions are typically clustered
at the top of the list, having yields that are separated by just
a few basis points. This minimizes the foregone interest earnings
of spreading funds among different institutions.
Again, the odds of a bank failure are slim. The Safe
& Sound rating system on Bankrate.com permits investors
to evaluate their bank's standing prior to investing, further reducing
the likelihood of experiencing a bank failure.
But for the truly risk-averse, the earnings foregone
by spreading funds among smaller accounts at the same or different
institutions has never been lower.
-- Posted: Nov. 2, 2001