Dear Dr. Don,
When an acquiring bank takes over the deposits of a failed bank, can it change the terms of the deposit agreement other than the CD rates? For example, could the bank decide not to allow early withdrawals, or increase the penalty for early withdrawals?
-- Dale Depositor
When an acquiring bank takes over the deposits of a failed bank, the acquiring bank can change the terms of the acquired certificates of deposit. That goes beyond just the interest rate the acquiring bank pays on the deposit to include early withdrawal policies and penalties.
The CD investor who has money on deposit at the failed bank has to choose to either accept these new terms -- including the new CD rates -- or to withdraw the funds on deposit without penalty. The acquiring bank decides how long the CD investor will have to make that decision. Here's how it's presented in the FDIC Web page "When a Bank Fails - Facts for Depositors, Creditors, and Borrowers:"
How does a bank closing affect interest accruing on my deposits?
The FDIC's insurance coverage includes principal and interest through the date of the bank failure up to applicable insurance limit for each deposit. The accrual of interest ceases on all accounts once the bank is closed. If an open bank acquires deposits from the failed bank, 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, but the depositor may withdraw their insured funds without penalty if they chose to do so. If no acquiring bank is found for the deposits and the FDIC pays the depositors directly for their insured amounts, interest does not accrue past the date of failure.
Because this passage doesn't specifically address your interest penalty concerns, I spoke with a public affairs officer at the FDIC. She explained that the CD with the acquiring bank is a newly issued CD with the terms set by the acquiring bank. The acquiring bank isn't held to the old terms of the failed bank.
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