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Do CD Rates Rise Before Bank Failures?

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When Washington Mutual collapsed about a year ago, it was offering an eye-popping 5% interest rate on certificate of deposits when its competitors were offering half that. Everyone knew that WaMu was in trouble and we all ran into the open arms of the 5% CD because it was FDIC insured. Were we right in thinking the higher rate a good indicator of a bank’s weakness?

Perhaps.

But I can say, with a little data to back me up, that a bank on the verge of failure may not show it in its CD interest rates. Corus Bank, one of the banks that failed on Friday, was on my list of best CD rates. Since June, I’ve been populating that table with the help of a database on the back end. That also means that I have historical rate information, which will come in handy to see if we could’ve predicted a bank failure based on CD interest rates.

Corus Bank CD Rates

Here’s what their rates have been for a 12 month CD:

  • June 8, 2009: 2.60%
  • June 18, 2009: 2.25%
  • June 30, 2009: 2.20%
  • July 10, 2009: 2.15%
  • August 4, 2009: 2.00%
  • August 16, 2009: 2.00%
  • September 7, 2009: 1.87%
  • September 11, 2009 (day of failure): 1.85%

As a reference, the rates on other CDs decreased at about the same rate (I didn’t perform any statistic analysis, just eyeballed the data). In other words, if you looked entirely at the CD rates, you would’ve had no idea Corus Bank was about to go under and cost the FDIC about $1.7 billion. Here is where I keep track of CD Rates on Bargaineering.com.

In the end, this doesn’t really tell us much other than a bank that is failing doesn’t necessarily boost its CD rates to try to gain more deposits. I figured I had the data, might as well take a look at it right?

{ 5 comments, please add your thoughts now! }

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5 Responses to “Do CD Rates Rise Before Bank Failures?”

  1. Curtis says:

    You’re right, of course, that CD rates alone can’t predict a bank failure. But it certainly can be one (of many…) indicators that a bank is struggling.

    I’d think that the direction CD rates right before a failure is more indicative of the mindset of management. WaMu was a nationwide bank and probably thought that it could attract enough deposits to stay open, and worry about the higher amount it had to pay in interest down the road. Corus, a regional bank, more likely realized it’s limited market share didn’t really lend itself (pun intended ;) to garnering large enough deposit amounts in CDs to stave off eventual failure. These are just guesses, of course, but they seem reasonable to me. :)

    Based on two examples alone (WaMu and Corus) there’s really not much to go on. What would be interesting would be to see how many of the banks that have failed in the last year raised CD (and perhaps other) rates just before they went under and vice versa. A statistical analysis might give more weight to whether CD rates are a general indicator or not.

    • Jim says:

      I agree, it’s not a lot of data to go on. WaMu had a greater reach so boosting the rates certainly increased deposits and Corus probably didn’t see it as a viable option.

      If someone else has the data, I’d love to see a real statistical analysis to see how much of a correlation there is.

  2. superdiamond says:

    You can’t judge CD rates for bank failure. There are so many contributing factors. I believe it’s the bank fees and changing the rules a bit to get more money. Corus bank as your example lowered their cd rates lower and lower.

  3. As a business writer watching banks go through their 1980s jams and this one, I’ve found several reasons why banks may hike CD rates when their competitors don’t. Basically they’re raising money for special purposes. Those might be benign, such as raising money for pot load of anticipated construction loans, or not so benign, such as spackling over some capitalization problems they hope regulators won’t notice. Also, sometimes they may have more than one purpose in mind, which doesn’t help analysis at all. Unfortunately,I don’t have squat for statistics to show this clearly.

    Always a pleasure reading you,

  4. Chris says:

    You must watch their trends. If you have an institution that starts competing heavlily in the market (CD) when they used to sit on the sidelines you know they are hurting for cash (liquidity). Banks never want to increase their cost of deposits unless it is a last resort or major marketing campaign change.


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