Durbin Amendment’s First Victims: Debit Reward Programs

The Durbin Amendment, which would limit debit interchange fees on debit cards to a mere 12 cents, is set to take effect soon but large banks are already cutting reward programs in anticipation of the amendment.

If you have a reward debit card from a large bank (over $10 billion in assets), then expect to see them kill your reward program. Wells Fargo is no longer offering the program to new customers as of March 27th for Wachovia customers and April 15th at Wells Fargo customers (existing customers will keep the program for now). JPMorgan Chase told its customers that the program will end on July 29th. SunTrust will end its program April 15th. (link)

Curious if you’re bank is a large one? This list from the National Information Center shows the top fifty bank holding companies and each one has over $10 billion in assets. What you won’t find on this list, usually, are those smaller regional banks that offer reward checking accounts, which need debit interchange fees to pay for the higher yields.

The writing is on the wall: If you like your debit reward cards, you’ll need to find a smaller bank.


High Yield Savings & CDs at Struggling Banks

My advice? Skip them.

A few months ago, I opened a Washington Mutual account because they were offering excellent interest rates on both their certificates of deposit and their high yield savings accounts. We’re talking 4% numbers, 5% for the CD, in an period of 3% averages, it was pretty meaty stuff.

At the time, I was focusing on FDIC insurance and how it would protect your funds. Your principal was not at risk. A scant month or so later, WaMu fails. JP Morgan Chase assume the deposits, all of which were insured, and things are as they ever were. Then the online savings interest rate, which is never guaranteed, falls. I didn’t have a CD so I don’t know if the CD rates were honored by JP Morgan Chase but they didn’t have to be.

When a bank fails and is assumed by another bank, with the FDIC as an intermediary, the new bank does not have to honor the former bank’s certificate of deposit rates. The CD is normally a contract but in this particular case, either party can cancel it at will. The new bank can change the interest rate but the CD owner can redeem the CD early without penalty. Sometimes they honor it, sometimes they don’t, it all depends on how badly they want those deposits and at what price. When a bank is struggling, it often increases those rates to get more deposits and the new bank may not want to pay above market interest rates for no good reason.

But, if Bank A buys or merges with Bank B, it must honor all of Bank B’s contracts – which includes CDs. In a failure, Bank B goes first to the FDIC and then to Bank A, which is why they don’t need to honor CDs. If it’s a purchase or merger, they are required to honor them because they purchased the contracts when they purchased the bank.

Knowing what I know now, I’d avoid the hassle of opening up an account with a bank that’s been in the news as having liquidity issues (fortunately none of the big banks left have been in the news for this). It’s a crapshoot as to whether you’ll have your CDs honored (when Citi Wells Fargo acquired Wachovia [I can’t keep these failures straight!], it was a purchase and thus CDs were honored; when JP Morgan Chase “acquired” WaMu, it was a failure and CDs didn’t have to be honored) and the bottom line is that it’s simply not worth it.

I earned an extra percent or two of interest for a few months in return for the hassle of opening and then subsequently closing an account. Not worth it.

 Your Take 

Your Take: Applaud the FDIC on WaMu & Wachovia Deals?

WaMu SucksThe bailout bill and its failure to pass the House, coupled with the 777 point fall of the Dow at the beginning of the week, has really dominated the headlines recently so it’s not surprising that not many people have focused on this bit of news – the FDIC managed to broker the sale of Washington Mutual to JPMorgan Chase and parts of Wachovia to Wells Fargo (link) Citigroup and they didn’t bankrupt themselves (or go to the government for more money).

For weeks (if not months), people have talking about how the failure of Washington Mutual, the largest thrift with $307 billion in assets, and the failure of Wachovia, who had a loan portfolio of $312 billion, would bankrupt the FDIC. The FDIC isn’t entirely off the hook though, the FDIC is backing some of the downside loss on the bad debt, but as it stands right now they managed settle two big issues without much loss.

If you’re curious as to the details of both deals, here’s an article about JPMorgan Chase acquiring WaMu assets and here’s an article about Wells Fargo buying up Wachovia’s deposits and banking business. While it still remains to be seen whether everything involving these banks is OK, it definitely two headaches off the radar for now.

Do you think we should applaud the FDIC for dodging a huge bullet (at least for now)? Or did we just shuffle the deck chairs?

(Photo: Sërch)


What Happens To CDs After Bank Failure

JPMorgan Chase BranchWith the very public and very large failure of WaMu, you might be wondering what happens to all those nice, fat 12-month 5% APY certificate of deposits you may have recently opened. In the case of WaMu, it appears as though JPMorgan Chase will be honor those CDs to term. If you review the FDIC’s FAQ on the WaMu takeover, “JPMorgan Chase accepted Washington Mutual’s interest bearing accounts including CD’s at the contract rate; therefore, they are not waiving early withdrawal penalties.” That means the CD’s will stay the same (in fact, you probably could open a 5% APY CD right now and it would still be honored, though you can close to that high of a CD rate at other banks).

The WaMu example is an example of a best case scenario, where nothing happens except the name of the bank on the statements. The best case scenario is that a bank acquires the deposits of your failed bank and continues to honor the CD’s terms as JPMorgan Chase does. (Of course, this depends on what your definition of best case is, if you got locked into a long term low interest rate from a few years back, maybe best case is they cancel all the CDs!)

Not all cases end this way, but even the worst case scenario is no big deal. The worst case scenario is that the FDIC is named the receiver, no bank buys the deposits, and they terminate the CD. Even in the worst case, you get all of your insured money back (just a little earlier than you anticipated).

Or, skip all the CD hullabaloo and stick the funds in one of several very popular and totally liquid high yield savings accounts.

(Photo: thetruthabout)


Washington Mutual Acquired by JP Morgan Chase

The word on the street is that JP Morgan Chase is buying parts of Washington Mutual after the FDIC seizes the country’s largest thrift. I guess all the reports of WaMu’s demise were not so greatly exaggerated.

The government on Thursday made the largest bank seizure in American history, taking over Washington Mutual, the severely troubled savings and loan, and selling pieces of it to JPMorgan Chase in an emergency deal intended to avoid sticking the taxpayer with a bill for another bank, according to people briefed on the plan.

Game over WaMu.

(WaMu account holders should read this FAQ that Chase published to learn what’s new)

Government Seizes WaMu and Sells Some Assets [New York Times]
JPMorgan Chase May Acquire Washington Mutual After FDIC Seizure [Bloomberg]

Advertising Disclosure: Bargaineering may be compensated in exchange for featured placement of certain sponsored products and services, or your clicking on links posted on this website.
About | Contact Me | Privacy Policy/Your California Privacy Rights | Terms of Use | Press
Copyright © 2016 by All rights reserved.