Those long lines of depositors standing outside Ohio savings-and-loans last month may have had some far-away companions. Banks and thrifts in Ohio and several other states have spent a lot on advertising in the last year or so, trying to attract deposits from other parts of the country. People responding to these ads -- usually in newspapers -- may not be aware that their money is insured by a private insurance fund, not the federal government.
``The national CD [certificate of deposit] market is the hottest new phenomenon in consumer banking that's happened in the last year,'' says Robert Heady, publisher of Bank Rate Monitor and 100 Highest Yields, two North Palm Beach, Fla., newsletters. ``Many banks and thrifts are marketing outside their home state.''
In some cases, Mr. Heady says, an institution will place ads in out-of-state newspapers hawking a particular rate. While that rate might be higher than the banks in the advertising target area are offering, it is sometimes lower than other institutions in the bank's home territory are paying. This could bring in a nice supply of cheaper deposits.
Some banks and thrifts may also advertise for distant depositors if they are heavily involved in lending, particularly for home construction, Heady says. This is more common among banks in the South and West, he notes.
The advertised rates often can be rather tempting, Heady says. At any particular time, he notes, it is possible to see out-of-state rates that are 2 to 3 percentage points higher than the old corner bank is offering. On a $10,000 deposit, that can mean an extra $200 to $300 a year. Higher rates are not confined to non-federally insured banks and thrifts, he adds, though customers may sometimes have trouble telling one from the other.
There are nine states with private insurance funds, Heady says. Members of the Thrift Guarantee Corporation of California cannot accept out-of-state deposits, but the others can. Besides Ohio, they are Colorado, Georgia, Maryland, Massachusetts, North Carolina, Pennsylvania, and Utah. Deposit insurance ranges from $15,000 to unlimited coverage.
Since the Ohio banking crisis, banking officials in all of these other states have taken great pains to point out that a similar problem couldn't happen in their states. They claim, for instance, that they don't permit a thrift to get as heavily involved with a company as Home State Savings Bank of Cincinnati did with ESM Government Securities Inc., the Fort Lauderdale, Fla., brokerage that went bankrupt. Or they place limits on the types of loans their members can make, particularly commercial loans. Some state insurance funds also use totally independent outside regulators to police member institutions.
All of this is meant to ensure the same level of confidence in the state-insured banking systems as that enjoyed by banks and thrifts backed by the US government. For the most part, it has succeeded and will probably continue to do so.
Still, private insurance programs lack two key ingredients enjoyed by the Federal Deposit Insurance Corporation (FDIC) and the Federal Savings and Loan Insurance Corporation (FSLIC). In addition to the insurance dollars on deposit, both federal agencies have access to the US Treasury. If it has to, Congress will provide whatever money is necessary to guarantee deposits. The states haven't been able to print money for over 100 years.
The FDIC and FSLIC can also arrange mergers between failing institutions and stronger ones. With prohibitions against interstate banking breaking down, they can even go to another state to find a rescuing bank. Ohio Gov. Richard Celeste, in fact, said Tuesday an out-of-state bank was being considered to buy Home State.
For these reasons, Heady says, people who want to ensure that their funds are fully protected should deposit money only at institutions insured by FDIC or FSLIC.
In preparing his 100 Highest Yields newsletter, Heady just includes banks and thrifts that are federally insured. This is only partly because of the federal insurance, he explains. When he's comparing a deposit instrument from a bank in one state with one from another state, he wants to be sure the comparisons start from the same basis. It's the same problem anyone looking for high rates in another state would face.
``It's physically and mentally impossible for customers in one state to understand the insurance in all the other states,'' he says. With federal insurance, though, the protection is the same everywhere, so the CD products are the same, except for interest rates and compounding.
Beyond this, remember that the limit on federal insurance is $100,000. While FDIC and FSLIC-arranged mergers often cover all deposits at the failed institutions, the legal obligation is $100,000. That's per person, not per account, so if you're putting in more than that, open an account at another federally insured bank or thrift, or open one in a family member's name, if that suits you.
Finally, if you deposit the full $100,000, only the principal would be covered, not the interest that accumulates afterwards, since the total value of the account is over the federal limit.
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