Certificate of Deposit and Bank Failure

When the economy is clipping along at a strong, healthy rate, you can expect four to five banks to fail each year. In 2012, however, 51 U.S. banks failed, according to "USA Today." That might sound high, but it is a sharp drop from the previous year when 92 banks went under. Because of required insurance through the Federal Deposit Insurance Corporation, the covered principal and interest on your certificates of deposit with an FDIC-member bank are safe.

Certificate of Deposit

A certificate of deposit is a special type of bank account that typically earns a higher rate of return than standard passbook savings or money market accounts. The interest rate bump is based on you agreeing to leave your money on deposit for a specified period of time, such as six months. You might also get a better rate for making a larger deposit. Some banks offer CDs with a number of attractive features, such as adjustable interest rates, early withdrawal options and the ability to contribute additional amounts to the CD.

Deposit Insurance

All nationally-chartered banks are required to be members of the FDIC. State-chartered banks are governed by state regulations, but most states also require FDIC membership. Member banks pay an assessment fee to belong to the FDIC, almost like an insurance premium to cover the bank's deposits if it fails.

FDIC Coverage

The FDIC insures your deposits at a member bank up to $250,000 per account ownership category. Account ownership categories should not be confused with account types. An account ownership category includes single accounts, joint accounts and individual retirement arrangements. Account types include savings accounts, money market accounts, checking accounts and certificates of deposit. If your bank fails, the FDIC would cover up to $250,000 in your single account, another $250,000 in your joint account and another $250,000 in your IRA account.

CD Concerns

If you got your certificate of deposit from your FDIC member bank, it qualifies for FDIC insurance, provided your total deposits in that ownership category don't exceed $250,000. Some companies that aren't FDIC-member banks have bank-sounding names and issue financial products they call certificates of deposit, which might not actually be a deposit product. These so-called "CDs" are not insured by the FDIC. If the issuing company fails, you could lose some or all of your investment. Some investment brokerage firms offer brokered CDs, which might or might not be FDIC-insured. The FDIC urges depositors to verify the CDs insured status before making the investments.

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About the Author

Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.

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