Rates up as demand for safe CDs jumps
By Laura Bruce • Bankrate.com

The litany of billions of dollars in net losses in the banking industry can raise troubling questions among customers. What does it mean to them? Will their institutions topple like IndyMac Bank? Will they learn from the news that their bank is considered poorly managed? Or that it's going to be taken over by a bank they know nothing about?

Turns out customers aren't waiting around to find the answer in the news. Long lines of worried depositors in the hot sun outside IndyMac prompted many people to contact their banks and ask about the safety of their deposits. And, as it turns out, once they get up-to-date on FDIC insurance limits, a lot of them are jumping into the safety of certificates of deposit -- especially ones with enticing yields.

The FDIC reports that at year-end 2007, less than 62 percent of the $6.88 trillion on deposit in FDIC-insured banks was covered. That's $2.64 trillion left unprotected in the event of bank failures. Somewhere along the way we -- individuals and businesses -- developed great faith that banks wouldn't go under.

CD boom
Wachovia's recent announcement that the company had a net loss of nearly $9 billion in the second quarter understandably prompted concern among some customers. Apparently, bank personnel are doing a decent job of calming those fears and, when combined with the flight to safety from the stock market, it's turning into a bonanza for the bank.

Yanneth Villarreal, Wachovia's retail bank director for Florida's Palm Beach County, says tellers and other employees have been trained to explain to customers how they can ensure their deposits are covered by the FDIC through the proper titling of accounts. As customers' qualms are allayed, they're snapping up the bank's CDs.

"Last week we brought in $4.7 billion (nationwide) in CDs compared to about $800 million the week before," says Villarreal. "In Palm Beach County, we've brought in more than $300 million in about 18 business days this month."

Wachovia is wooing interest-starved, safety-conscious customers with a 4.25 percent, one-year CD. Competitor Bank of America is touting that demand for its 4 percent, seven-month CD is so strong that the bank extended its hours of operation in some markets recently.

Balancing act for banks
But, as always, how well you'll fare as a depositor depends on where you bank.

Bart Narter, banking industry analyst and senior vice president of the banking group at Celent in Boston, says bank woes mean that customers will be affected positively and negatively by deposit rates.

"There's pressure for banks to increase their profits, and whether they can get away with higher rates on deposits is a question. Some banks that need cash will pay high deposit rates and advertise them. But if they feel pressure to increase profits, they may cut rates."

Stay within FDIC limits
Keeping your deposits within FDIC limits is critical. Relatively few customers would be game to try to determine their bank's financial health by examining its quarterly report. With all the problems we've witnessed over the past year, would it even matter? Stay within the insurance limits and you won't need to worry.

"It's great that we have access to information, but it did no one any service to see people lined up outside IndyMac," says Herb Hopwood, president of Hopwood Financial Services in Great Falls, Va. "The reality of it was that 99.9 percent of them had nothing to worry about. There was no risk to their money."

But customers may get the short end of the stick when and if they need to borrow. Hopwood is leery that the multibillion-dollar losses banks are posting have caused the pendulum to swing too far in the opposite direction.

"Getting credit is not easy," he says. "(Banks) went too far before lending to all these people that should have never gotten homes. The flip side is we're in a position where, perhaps, the banks are getting too tight."

As investments, banks on hold
Narter says today's banking losses are affecting big and small banks equally, whether online or traditional brick-and-mortar institutions.

"It's 'What kind of mortgage loans did you make?' The individual banks that got involved in subprime or Alt-A -- it has nothing to do with online versus brick and mortar. Is a big bank safer than a small bank? No, but a small bank isn't safer than a big bank. It's how the bank is run. Did they buy a bank with a whole bunch of option mortgages or did they buy the largest mortgage company in the country?

"A lot of banks are doing just fine, the majority actually. Before, I think a lot of banks were in denial. Now, most banks have said, 'Houston, we have a problem. We have to cut the dividend, we have to change the way we do business.'"

Customers should also expect to see considerable consolidation within the industry as stronger candidates take this opportunity to buy weaker institutions at bargain basement prices -- or at FDIC fire sales.