Have More Than $100K In The Bank? Better CYA

What would happen to your cash in the bank if the bank went belly-up? If the bulk of your over-$100K down payment was in your checking or savings account, what would happen to you come settlement day if your bank was belly-up and you couldn't recover more than the $100K covered by the FDIC?

That's what a client of mine and I were just talking about after hearing of National City and Wachovia's problems. They were concerned that if their bank temporarily halted operations or went belly-up, they would lose out on any amount over $100K, not be able to buy the home and be in default because of it.

You have several options depending on how much money and time you have as well as other factors. Here are two:

1) One of your options is to open up accounts at multiple banks none of which have more than $100K in them. You may actually want to limit yourself to $95K to leave room for interest. This option is time consuming, requires additional paperwork, etc. But it may not a bad idea for those who have to only open up one or two additional accounts.

2) Another option you may want to consider is called the Certificate of Deposit Account Registry or CDARS. It allows you to keep up to $50 million invested in CDs in one bank, all covered by FDIC insurance. This is definitely the easiest of the two options and great for those with a lot of cash on their hands. BankRate.com has a great explanation of how it works. Here's an excerpt:

Sally Jones has $130,000 she wants put in CDs in bank A. Bank A gives her CDs worth $95,000 -- leaving a little room for interest -- and sends Sally's remaining $35,000 to a company that knows bank B will issue Sally a CD for the remaining $35,000. In return, bank B buys $35,000 in CDs for its customers from bank A.

The company in the middle is Promontory Interfinancial Network. It acts as a sort of clearinghouse, matching deposits from one institution with another so funds that a bank places with CDARS essentially remain on the bank's balance sheet.

"Prior to CDARS, if you wanted to insure more than $100,000, you had to do it through (different categories of legal ownership.) Now you can title it any way you want and we can cover it through the CDARS program," says Russell Pemberton, vice president at Pulaski Bank.

Your bank sets the interest rate for the CDs bought through other banks. If Sally wants her excess money to buy a two-year CD and her bank, bank A, is paying 2 percent on that maturity, then bank B will issue the CD at 2 percent even if they're paying more or less.

One drawback to the convenience of CDARS is that you can miss out on higher CD rates offered by banks other than your own. If you're willing to do a little extra legwork, you could get around that by finding a bank in the CDARS network that you believe consistently offers higher rates and open an account with them specifically for CDs.

The morale of the story is to protect your cash and yourself because you never know what may happen to your bank. Recent years have proved that no one is immune to the housing and credit turmoil so always be prepared.

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