When Silver Falls Bank in Oregon failed,the acquiring bank, Citizens Bank of Corvallis lowered depositor CD rates from 4% to 1%. All deposits (except for brokered CDs) were purchased and protected, even if customers held above $250,000. But the downside is that the rich rates they had locked in with Silver Falls Bank CDs were gone.
Often, depositors dismiss bank soundness, figuring that if a bank fails the FDIC will insure their cash anyway. And as we've seen, the FDIC is quick to compensation depositors and make them whole. In most cases users never even lose access to their funds. But the downside is that the acquiring bank has the right to rip up CD contracts and offer new, often lower rates.
From an article in OregonLive.com.
"In receiverships or bankruptcies, all prior contracts are null and void unless they're reaffirmed," said Richard Renken, program manager for banks and trust at the Oregon Division of Finance and Corporate Securities.
However, Citizens was required to notify Silver Falls customers of any rate change and give them time to cancel their CD agreements without penalty, Renken said. The bank did so."
While Wells Fargo and JP Morgan Chase are honoring CDs they took over from Wachovia and Wamu, this isn't required and doesn't always happen. This is particularly relevant if you lock in a great long-term CD rate. It may not be a reason to forego deposting in a bank, but it's someting to think about.
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Related Articles:
Alpha Bank & Trust, Alpharetta, GA Closed by the FDIC by Sam Cass - Oct 27, 2008
Falling Below 13,000 is a Big Deal by DanS - Nov 19, 2007
IndyMac Bank is the fifth FDIC-insured failure of the year by ktexas - Jul 11, 2008.
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