How Safe Are Your CDs?

Suppose you had a lot of what I call "chicken money." That's money you can't afford to lose. It's money that belongs someplace really safe, like certificates of deposit at a bank, or perhaps in a money market account or T-bills. But depositing money at a bank isn't without risk, because the Federal Deposit Insurance Corp. doesn't guarantee accounts over $100,000. Astoundingly, the FDIC reports that out of $6.7 trillion in bank deposits, there is $2.4 trillion above the insured limits.

Having uninsured deposits must have kept some people up nights this past week after U.K. mortgage lender Northern Rock faced an old-fashioned "run on the bank." (In the U.K. only the first 2,000 pounds are fully insured; the next 33,000 pounds are only 90% covered, leaving the depositor with a 10% "haircut" in the event of a bank failure.) In order to restore confidence, the Chancellor of the Exchequer took the extraordinary step of guaranteeing all of Northern Rock's deposits.

Many people here in the U.S., especially senior citizens with a memory of bank failures in the 1930s, are very mindful of the limits of FDIC insurance. But you don't have to have a very long memory to be concerned about the safety of your deposits. As recently as the 1980s, many savings and loans and banks that failed left unwary depositors with losses on accounts above the insured limits.

While it's possible to insure up to $1 million at one bank by using a combination of joint accounts and trust accounts, this is cumbersome and many people misunderstand the complex ownership rules.

That's what makes a service called CDARS so appealing. The acronym stands for Certificate of Deposit Account Registry Service. It's a computerized process that allows your large CD deposit to be distributed among multiple banks in amounts below the insured limit, so that all of your money is FDIC insured. It's similar to the process of walking around town to open accounts in multiple banks - but it's all done by computer, and you receive one statement and one rate on all your CDs. And there are no fees or costs to the depositor!