Preservation with CD’s

[Rianne]

I bought a 10-year noncallable CD at 4.55% ($100K) on VG. I research the bank's ratings, BBB, and any online information I can find. The bank I bought this from is unknown to me but got an A+ rating on BBB and had positive information online. I don't know how else to research a bank's reliability.

 

[pb4uski]

^^^ If the brokered CD is FDIC insured (I suspect that Vanguard would not sell brokered CDs that are not FDIC insured) and you are within the FDIC limits for that bank (which is the prudent thing to do) then you don't have to worry about ratings a bit.

In most cases where the FDIC takes over a troubled bank they do it on a Friday and everything is all sorted out by the following Monday.

 

[Rianne]

^^^ If the brokered CD is FDIC insured (I suspect that Vanguard would not sell brokered CDs that are not FDIC insured) and you are within the FDIC limits for that bank (which is the prudent thing to do) then you don't have to worry about ratings a bit.

In most cases where the FDIC takes over a troubled bank they do it on a Friday and everything is all sorted out by the following Monday.

Thanks for that reassurance. All VG CDs are FDIC-insured. I didn't know how the process worked if a bank failed. I imagine any bank can fail, big or small.

 

[Rianne]

^^^ If the brokered CD is FDIC insured (I suspect that Vanguard would not sell brokered CDs that are not FDIC insured) and you are within the FDIC limits for that bank (which is the prudent thing to do) then you don't have to worry about ratings a bit.

Brings up a point I've thought about as well. Sometimes banks are subsidiaries or branches of a bigger bank. How do you make sure you're not going over the $250 limit within a bank? Are smaller banks that are part of a bigger bank considered one bank, if that makes sense?

 

[pb4uski]

Thanks for that reassurance. All VG CDs are FDIC-insured. I didn't know how the process worked if a bank failed. I imagine any bank can fail, big or small.

Brings up a point I've thought about as well. Sometimes banks are subsidiaries or branches of a bigger bank. How do you make sure you're not going over the $250 limit within a bank? Are smaller banks that are part of a bigger bank considered one bank, if that makes sense?

On the first part, there are some banks that are "too big to fail".

On the second part, I'm pretty sure that subsidiaries would be separate... IOW it is administered by legal entity so a branch would not be separate. If you are close and have concerns the FDIC website offers a tool to se your coverage.

And IIRC the limit is $500k for joint accounts and are also separate for taxable vs retirement accounts. IOW, if you are married and have $500k in a joint account and each have $250k in retirement accounts at the same bank then the entire $1m is covered.

 

[Rianne]

On the first part, there are some banks that are "too big to fail".

On the second part, I'm pretty sure that subsidiaries would be separate... IOW it is administered by legal entity so a branch would not be separate. If you are close and have concerns the FDIC website offers a tool to se your coverage.

And IIRC the limit is $500k for joint accounts and are also separate for taxable vs retirement accounts. IOW, if you are married and have $500k in a joint account and each have $250k in retirement accounts at the same bank then the entire $1m is covered.

 

[Al18]

FDIC posts a list of bank failures https://www.fdic.gov/resources/resolutions/bank-failures/failed-bank-list/

There were 5 bank failures in 2023, none in 2022, none in 2021 and 4 in 2020.

 

[Rianne]

Question: For those seasoned in buying CDs.
-I have 2 treasuries maturing on 12/15/2023
-I see 2 CDs I like settling on 12/18/23
VG says I can purchase those CDs before maturing since the settlement date is later than maturing

Can the bank back out before the settlement date? I understand that is the date interest starts accruing and I have a negative in my account b/c I bought these before the mature and settlement dates.

 

[ERhoosier]

I'm mainly in bonds (Treasuries/AA muni's) for my fixed income AA, but there are some (non-callable) CDs that are attractive too these days.
When tying up $$ in longer term bank CDs I ALWAYS consider the financial stability of the bank(s) involved (like comparing Bauer Financial's 'Star' ratings- not perfect but a start)
https://www.bauerfinancial.com/star-ratings/
And some banks have fees (sometimes hidden) &/or rollover provisions that can eat into the NET CD returns.

When safety is #1, NEVER put more than $250k (each depositor) in any single institution. Bank failures are possible, and FDIC payouts in such (rare) instances can take time. Perhaps OCD, but I always verify FDIC insurance (ask for bank's FDIC Certificate, or NCUA Charter Number for credit unions). That FDIC (or NCUA) info makes it easier to research the firm's financial stability too.

 

[Al18]

If Vanguard operates like Fidelity, you have essentially placed an order for a CD, but the order hasn’t been filled (withdrawn from you settlement account) until 12/18 - so your order should go thru. The brokerage is the one handling the orders and they won’t allow orders in excess of what the bank agreed to. The chances of the order not going thru are very, very, very tiny IMHO and it’s never happened to me.

 

[jazz4cash]

Question: For those seasoned in buying CDs.
-I have 2 treasuries maturing on 12/15/2023
-I see 2 CDs I like settling on 12/18/23
VG says I can purchase those CDs before maturing since the settlement date is later than maturing

Can the bank back out before the settlement date? I understand that is the date interest starts accruing and I have a negative in my account b/c I bought these before the mature and settlement dates.

I don’t know for sure and I never really considered the bank changing it’s mind. I assume it’s possible under extraordinary circumstances. I believe there is higher risk that the issue will be sold out if you wait to place your order, especially if it is a better deal than similar issues. Generally speaking most of what I see available is not unique or special with the possible exception of the monthly payers if that is important to the buyer.

 

[audreyh1]

Question: For those seasoned in buying CDs.
-I have 2 treasuries maturing on 12/15/2023
-I see 2 CDs I like settling on 12/18/23
VG says I can purchase those CDs before maturing since the settlement date is later than maturing

Can the bank back out before the settlement date? I understand that is the date interest starts accruing and I have a negative in my account b/c I bought these before the mature and settlement dates.

Probably not, but I really don’t know. They haven’t received the money yet.

I see CDs disappearing because all that were offered were ordered already. I imagine a bank could also reduce their offer size and not take any more orders.

There is also a window where you can cancel your order, but when this closes, and it can be well before the issue/settlement date, you are committed. Maybe the bank has a similar restriction?

 

[Rianne]

In my earlier post, I presented an example. This is what happened. One treasury and one CD are maturing on 12/15 and 12/28. I purchased 2 CDs (4.3% - 5 years) settling on 12/28 and the trade was executed. I was concerned with the rates dropping, the bank could pull out of the trade with the settlement so far out.

Once executed the bank cannot cancel the trade. I called VG to verify, which makes me happy. The purchase settling on 12/28 is over $168K for 5 years. Dodged a bullet.