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Casting a wider net may pay when you shop for CD, savings, and money market rates

February 09, 2011

| MoneyRates.com Senior Financial Analyst, CFA

FDIC deposit insurance is a great benefit for depositors, but that benefit comes at a price. Changes in how that price is paid could affect the interest rate on your CDs, savings accounts, and money market accounts. Why is this?

Big isn't always beautiful

The banking business is very top-heavy, where a relatively small number of large banks control a disproportionate percentage of deposits. According to the New York Times, roughly 110 of the largest banks--out of more than 7,500 FDIC-insured institutions--have 80 percent of U.S. deposits.

During the financial crisis, these large banks also represented a disproportionate amount of the risk to the system as a whole. That's one reason why one provision of the Dodd-Frank Act will shift the burden for paying FDIC insurance premiums more towards larger banks when that provision goes in to effect later this year.

Banks with more than $10 billion in assets will now pay more in fees. Just how each bank is affected depends on its asset structure, but collectively these large banks will pay 12 percent more in FDIC insurance premiums. Because their size outweighs the much larger pool of smaller banks, that 12 percent rise in large-bank premiums will translate to a 30 percent savings in FDIC premiums for banks with less than $10 billion in assets.

In total, this provision neither raises nor lowers the amount of FDIC insurance being collected--it simply shifts more of the burden up to the nation's largest banks.

Shopping for CD, savings, and money market rates

Of course, the large banks have to make up for this added cost somewhere, and one likely outcome is that it will reduce the interest rates they offer on CDs, savings accounts, and money market rates. Meanwhile, with reduced premiums smaller banks will have more room to add to those rates.

This is a signal to cast a wide net when shopping for rates. It could pay to look beyond the obvious big banks.

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