Does Increased FDIC Insurance Ensure Low CD Rates?
March 30, 2010
In response to the banking crisis, the Federal Deposit Insurance Corporation (FDIC) raised the limits on bank deposit accounts from $100,000 to $250,000 per depositor, per bank. This move may have been pivotal in preventing a run on banks in America.
Nevertheless, there may be a convincing argument to be made that the increase in FDIC insurance, insofar as it shows how utterly committed the U.S. government is to protecting bank deposits, is actually a negative for higher bank rates.
In essence, banks are able to charge bank customers a premium--in the form of paying a lower interest rate--because these accounts are backed by the full faith and credit of the United States Treasury.
In the case of savings accounts, it's not likely that many conservative investors would trade the added security for an extra half-point interest rate hike on savings accounts.
However, for the crowd that cares about CD rates, this trade might be more appealing. A one percent higher interest rate on a $200,000 CD means an extra couple hundred bucks per month--and the possibility, over time, to build wealth through consistently seeking out the best CD rates.
What do you think? Would you rather have your jumbo CD money slightly more at risk, in return for a higher interest rate in the meantime?
