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CDs safe in debt default?

By Sheyna Steiner ·
Tuesday, July 26, 2011
Posted: 4 pm ET

Nothing like the prospect of financial calamity to make today's paltry CD rates more palatable. While CD investors may not appreciate yields less than the inflation rate, they may be reveling in the risk-free aspect of CDs right now.

CDs are, of course, insured by the Federal Deposit Insurance Corporation for up to $250,000.

One question that may have occurred to more perspicacious among us: could a government default affect FDIC-insurance?

Short answer: No. The long answer is yes -- with a but.

Banks pay into the insurance fund to cover the cost of defaulting banks.

But, "if the FDIC insurance fund is depleted, that's when the government steps in. In a government default there's no government backstop. It's extremely remote but that's kind of the pre-requisite for that scenario happening," says Bankrate's senior financial analyst Greg McBride.

So, in the worst of the worst-case scenarios, in which a lengthy government default triggered an avalanche of bank failures that overwhelmed the FDIC, your CD's insurance could be affected.

Don't panic though. CDs are still a safe, solid option.

"You'd have to knock over a lot of dominoes to get from here to there. You'd have to have a prolonged default -- not one that just lasts a couple of days and then they get the deal done because financial markets are cratering," says McBride. "You'd have to have a prolonged default -- and even then, there would be so much mayhem before it ever got to that point, Congress would be compelled to raise the debt ceiling."

As always, it behooves savers to thoroughly investigate the institutions with which they entrust their money. Bankrate evaluates the financial soundness of banks, savings institutions and credit unions throughout the country and gives them a Safe and Sound rating. Check your bank's soundness.

It's an interesting hypothetical but, "it's certainly not worth worrying about. That would literally be the collapse of the entire financial system," McBride says.

Are you nervous about the debt ceiling talks? If the markets are any indication, most people are still pretty cool about the situation.

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July 29, 2011 at 12:36 am

Take your money out of the bank, that is the most prudent thing to do. Dont trust the BANKSTERS with your hard earned $$$ you are just a number to them they could care less about you.

July 28, 2011 at 6:44 pm

savings are liquid accounts with little to no in a worse-case scenario, you withdrawn and run. CDs are termed accounts, which means your money is invested for a period of time in order to gain interest. Early withdrawal of CDs usually there's a penalty fee for early withdrawal, however, for the most part it is one of the safer termed investments.

ron law
July 28, 2011 at 5:19 pm

The second ammendment was put there to protect us from OUR government, not foreign entities like the right wing zealots want you to beleive!

Alfred Albert
July 28, 2011 at 4:09 pm

How safe are life insurance annuities?

July 26, 2011 at 7:13 pm

Are savings accounts safe?