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Jumbos just aren't worth the risk right now

Greg McBrideEditor's 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 at $100,000.

There 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 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 one-year CDs.

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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 discouragement."

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 exist.

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'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 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

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