Questions, answers on deposit safety

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Given the financial crisis, it's no surprise that I continue to get questions from readers about the safety of their bank deposits.Q: I'm looking for high-yielding certificates of deposit, and some small banks I've never heard of are offering the highest rates. Should I trust them?A: It's not unusual to see small banks and credit unions offering above-average rates, perhaps because they don't have the physical presence or marketing budgets of large banks. In some cases, high yields might mean a bank of any size is desperate for deposits.As long as the institution is insured by the Federal Deposit Insurance Corp. or the National Credit Union Association and you keep your deposits under the insurance limit, you should not worry about losing money, although you could be slightly inconvenienced if the institution failed. Both the FDIC and the NCUA are backed by the full faith and credit of the U.S. government. Q: What are the insurance limits?A: The same limits generally apply to banks, thrifts and credit unions. The basic limit is $100,000 per person per account type per institution. In addition, each person can have a total of $250,000 in retirement accounts insured at the same institution.A married couple could have a total of $900,000 insured at a single institution: $100,000 in the husband's name, $100,000 in the wife's name, $200,000 in a joint account, plus $250,000 in retirement accounts in each of their names at the same bank. Depositors could get even more insured at the same institution by opening trusts in the name of certain beneficiaries, but the rules are complicated.Remember that insurance only covers deposits such as checking and savings accounts and CDs. Mutual funds and other investments sold by banks are not insured and do not count toward the insurance limit.Q: Does the FDIC insure interest, or just my principal?A: Both, up to the insurance limit.Q: How can I make sure a bank that says it's insured really is?A: For banks and thrifts, go to www.fdic.gov. In the upper right corner, click on Bank Find and enter the name of the institution. Banks that show up on this Web site are insured, but many banks have similar names, so make sure you check the right one. If in doubt, call the FDIC phone number listed above.For credit unions, go to ncua.gov/indexdata.html.It's crucial to check this list if you are doing business with an online bank or institution outside your area. If you plan to open an online account, going through this site will take you to the bank's official Web site so you won't be tricked by identity thieves.Q: What will happen if my bank fails?A: Normally, the FDIC finds a healthy insured bank to take over the failed bank's insured deposits. The failed bank is closed, and "the next business day it reopens as a branch of the new organization with no interruption in service for the average customer," FDIC spokesman David Barr says."In cases where we haven't been able to find a buyer, we've actually mailed checks to customers within 48 hours of the failure," Barr says. Customers who have uninsured deposits become creditors of the failed bank. Over time, they might get back all or some of their uninsured deposits, but there are no guarantees.The same generally holds true for credit unions.Q: What if I also have accounts at the acquiring bank and the merger pushes me over the insurance limits?A: Deposits will be separately insured for six months from the date of the merger. CDs that mature after six months will continue to be separately insured until they mature, the FDIC says.Q: Will the acquiring bank pay the same rate on my CDs as the failed bank?A: The acquiring bank has the option of lowering your CD rate to a market rate, but if it does, you may redeem the CD without an early withdrawal penalty, Barr says. If the bank does not change the rate, you will have to wait until the CD matures to avoid an early withdrawal penalty. E-mail Kathleen Pender at kpender(at)sfchronicle.com.(Distributed by Scripps Howard News Service, www.scrippsnews.com.)