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Do CD Rates Rise Before Bank Failures?

Posted By Jim On 09/16/2009 @ 7:27 am In Banking | 5 Comments

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 [3]. 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 [4] 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?


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