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Safe to buy CD from unstable bank?

By Sheyna Steiner ·
Monday, March 18, 2013
Posted: 12 pm ET

Bankrate, as the name implies, actually rates banks on safety and stability with the Safe & Sound Star ratings. Banks with a high level of fiscal soundness get five stars while banks at the other end of the spectrum get a one- or two-star rating. Luckily for everyone, the number of problem banks has declined since 2011, according to the blog Calculated Risk. That year, the Federal Deposit Insurance Corp.'s problem bank list peaked at 1,002 institutions. It has declined to 809 institutions recently, Calculated Risk reported in February.

Sometimes, banks on the wrong side of the star ratings offer higher-than-average deposit and certificate-of-deposit rates in an attempt to attract deposits. That can be a double-edged sword for CD buyers. On the one hand, you may get higher CD rates -- but if the bank fails, you may be slightly inconvenienced. As long as your deposits are under the FDIC limit of $250,000, there's no risk of losing your money.

According to the FDIC, the preferred way of handling a failed bank is to have a healthy bank take over the deposits of the failed bank. Customers of the failed bank become customers of the new bank, including CD owners. But the new bank may not offer the same interest rate on your CD. In the case of a bank failure, the acquiring bank has the option of cutting the CD rate.

CD owners have an out as well. They can opt to liquidate the CD without a penalty and take their money elsewhere.

Have you ever had to deal with a bank failure as a CD holder?

Follow me on Twitter: @SheynaSteiner

Senior investing reporter Sheyna Steiner is a co-author of "Future Millionaires' Guidebook," an e-book written by Bankrate editors and reporters. It's available at all the major e-book retailers.

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