First Republic, like several distressed regional lenders, found itself in turbulent waters when the Federal Reserve escalated interest rates to combat inflation. This move adversely affected the value of bonds and loans that First Republic had acquired during a period of lower rates. The subsequent fallout saw depositors withdrawing in search of better returns and, … [Read more…]
Banks serve two main purposes. They provide loans to consumers who need a helping hand, and they provide a place to store cash, also known as a deposit.
The two actions aren’t independent of each other, and are actually very much interconnected.
For example, banks lend money out a certain rate and pay customers a certain return if they keep their money at the bank.
The two rates rely on one another to ensure the bank makes money. The short version of the story is that the bank must pay depositors less than what it charges to lend.
That’s why we see mortgage rates on the 30-year fixed around 4%, and savings accounts paying closer to 1% APY. This spread allows banks to make money and continue lending to consumers.
While everyone has been banging on about low mortgage rates for years now, many fail to mention that savers (and really anyone without a mortgage) are getting the short end of the stick.
As noted, when interest rates on loans move lower, as they have over the past several years, savings rates must drop as well, seeing that the two tend to move in tandem.
Before the financial crisis, it was actually quite common to see savings rates in the 3-4% APY range, which certainly wasn’t bad from a saver’s point of view.
Banks were offering great savings rates because they needed more money in the coffers to lend out to consumers, who were especially hungry for loans.
Remember, banks were going haywire making new loans during the housing boom, so they also had to attract depositors to ensure they had collateral.
Interestingly, the gap between savings and mortgage rates wasn’t all that wide back then, with the 30-year fixed ranging between 5-6%, compared to around 4% today.
Meanwhile, savings accounts were commonly in the 3% or higher range if you went with a bank that offered a more aggressive return.
Today, the gap between one-month CD rates (0.06%) and the 30-year fixed (4.5%ish) is the highest it has been since mid-2011, according to MoneyRates.com, which releases the so-called “Consumer’s Lost Interest Percentage (CLIP) Index.”
The company noted that the gap widened to 4.43% in September, up three basis points from August. It has increased by a staggering 1.15% so far this year thanks to rising mortgage rates and savings rates that “haven’t budged.”
The average gap between CD rates and 30-year fixed mortgage rates since 1971 has been 2.83%, meaning today’s gap is 1.6% above the norm.
With the gap so wide, it’s clear that those with the bulk of their assets in low-paying savings accounts are losing out.
At the same time, mortgage rates are at near-record lows, so one has to scratch their head a little.
Do you pay down the mortgage early, which has an ultra-low rate that will probably never be lower? Or do you throw your money into a savings account that is paying next to nothing?
Or, do you say to heck with savings accounts and try your luck in the stock market, which also happens to be sky-high currently?
It’s certainly not an easy decision, and it’s clearly not good news for renters and those who have already paid off their mortgages.
But perhaps the best option is to tackle other high-APR debt, such as credit cards, which tend to have interest rates in the teens and higher.
If the only debt you have is mortgage debt, there are plenty of ways to pay down your mortgage a little quicker, including going with a shorter-term mortgage, such as the 15-year fixed. That will reduce the gap as well, seeing that rates on 15-year loans are lower than those on 30-year mortgages.
But you might regret locking that money up a few years down the line if both savings and mortgage rates go up, especially if inflation rears its ugly head.
Source: thetruthaboutmortgage.com
When you deposit money into a bank account, you expect that money to stay there until you withdraw it. But how can you be certain your money will be safe if the bank runs into trouble? That’s where FDIC insurance comes in.
“FDIC insurance ensures the safety of depositor funds up to a certain amount and promotes stability in the United States banking system,” explains Jason Koontz, an independent consultant with decades of experience in the banking sector.
FDIC-insured accounts, like those offered by FDIC member Discover Bank®, are protected up to $250,000 per depositor, per account ownership category, in the unlikely event of a bank failure. You probably have a lot more questions about FDIC insurance, so let’s dive into some answers.
First, let’s start with what FDIC stands for: Federal Deposit Insurance Corporation. Managed by this independent government agency, FDIC insurance is a program designed to protect deposits against the possibility of bank failures.
Banks can apply for FDIC deposit insurance and, assuming they meet the standard for approval, pay premiums to the FDIC for coverage. FDIC protection is backed by the full faith and credit of the United States government and assures that even if a bank fails, depositors won’t lose their protected funds.
The first deposit insurance programs in the United States were initiated and deployed at the state level. Starting with New York in 1829 until 1917, 14 states implemented plans to protect bank deposits and similar accounts. These programs were intended to protect depositors from bank failures and guarantee communities’ financial stability.
These efforts fell short, however, and by 1933, thousands of banks had closed and the entire U.S. financial system was faltering. Because past efforts to establish some sort of federal deposit insurance program had been unsuccessful, bank customers were left unprotected. Depositors lost $1.3 billion as a result of the thousands of bank failures stemming from the financial crash that led to the Great Depression. Considering inflation, that amount would currently equate to about $27.4 billion, according to the Pew Research Center.1
In response, Congress passed the Banking Act of 1933, and President Franklin D. Roosevelt signed it into law. The act officially established the FDIC to restore confidence in the banking system and prevent further financial collapse. Since then, “no depositor has lost a penny of insured funds as a result of a failure,” according to the agency.
While the FDIC insures banks, individual consumers benefit too.
“FDIC insurance benefits U.S. banking customers (citizens and foreigners) by providing peace of mind and confidence that their deposits are protected up to $250,000 per depositor, [per account category], per insured bank,” Koontz says. “In the event of a bank failure, the FDIC steps in to ensure depositors’ funds are reimbursed promptly, maintaining stability and helping to prevent panic in the banking system.”
Koontz explains that this protection applies to the accounts of individuals, families, and businesses and that it promotes trust and participation in the U.S. banking system. Bank customers don’t need to apply for FDIC insurance; they only need to make sure their bank is FDIC-insured.
You can usually find out if a bank is FDIC-insured by checking its website. Or you can search the FDIC database to find certified institutions in your area.
So, what does the FDIC do when an insured bank fails? Koontz explains that after a bank failure, the FDIC will take over as the custodian and manage the bank to minimize disruption.
“While this can happen on any day of the week, the FDIC often takes over a troubled bank on a Friday near the close of business,” Koontz says. He notes that the FDIC will have been doing plenty of work behind the scenes leading up to this day. “A Friday takeover allows the FDIC the weekend to work on the failed bank,” he continues. “The FDIC has several options for resolving a failed bank, including selling its assets and deposits to another institution, arranging a merger with a healthier bank, or creating a bridge bank to maintain banking operations until a suitable buyer is found.”
Of course, as mentioned above, the FDIC also protects the failed bank’s customers—up to $250,000 per depositor, per insured bank, for each account ownership category—if needed.
It’s also important to note that bank failures are very rare. Most of the time, banks are able to stay solvent. And if they’re FDIC-insured, the agency will examine and monitor them to ensure they comply with consumer protection laws.
If a bank fails, customers are at risk of losing unprotected funds. Funds may be unprotected if they’re held in a non-FDIC-insured institution, if they’re held in accounts that do not qualify for protection, or if the funds exceed the $250,000 limit.
In the rare occurrence that an insured bank fails, the impact on customers will depend on the steps the FDIC takes in response.
“If a bank is acquired by another institution, customers’ accounts and services generally continue without interruption, and they become customers of the acquiring bank,” explains Koontz.
In the case of a bridge bank, Koontz adds, customers can typically access their accounts and continue banking operations without significant disruption. “However, in some cases there may be temporary limitations on certain transactions or services until the resolution process is complete.”
The standard FDIC deposit insurance amount is up to $250,000 per depositor, per bank, for each account ownership category. That maximum applies to all the banks you have an account with, as long as the bank is an FDIC member. (Discover Bank is an FDIC member.)
You can use the FDIC’s Electronic Deposit Insurance Estimator, or EDIE, to determine your total coverage across all of your accounts and banks.
Koontz says it’s possible the FDIC may organize an arrangement to reimburse funds beyond the $250,000 guarantee, but you should not expect funds above that number to be protected. There are steps you can take, however, to maximize your FDIC protection.
If you’re looking to deposit more than $250,000—whether as an individual, a family, or a business—then the FDIC insurance limits may be a concern. Fortunately, there are some strategies you can use to increase the protection you receive.
One option is to open multiple accounts with different ownership categories at the same bank. “The FDIC provides separate coverage for different ownership categories, such as individual accounts, joint accounts, retirement accounts, and certain trust accounts,” Koontz explains. “By utilizing these categories effectively, you can increase your overall coverage.”
Another tactic is to open accounts at different banks, Koontz says. While it could be a little more inconvenient to manage accounts at different institutions, he notes that it’s wise to avoid keeping all your eggs in one basket.
“By distributing your deposits among different [insured] banks, you can ensure that each account remains within the coverage limit,” advises Koontz.
It’s also possible to increase your coverage by opening a revocable trust account and designating multiple beneficiaries. A revocable trust is an account that pays out to beneficiaries upon the death of the account holder. Consider consulting a tax advisor to discuss your specific situation.
As of April 1, 2024, the FDIC will insure covered trusts up to $250,000 for each of up to five beneficiaries. That means a trust could be insured up to $1,250,000 for a single account holder. The covered amount for a joint trust, meanwhile, could be up to $2,500,000 for five beneficiaries.
FDIC rules have changed multiple times since the program’s creation nearly a century ago. Koontz advises that you remain aware of any developments to be certain your deposits remain protected.
“It’s important to stay updated on any changes to FDIC coverage limits or regulations,” Koontz says. “Periodically review your deposit accounts and assess whether any adjustments are needed.” Again, that could include opening several different account types within one FDIC-insured institution or spreading out your accounts across several different FDIC-secured banks.
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Discover Bank, Member FDIC
Koontz’s insights into what the FDIC does and how it can assist you as a bank customer should help you gain confidence about opening an FDIC-insured bank account. That could include an online savings account, a cashback debit account, a certificate of deposit (CD), a money market account, an IRA savings account, or an IRA CD.
While FDIC rules apply to every insured account, everyone’s financial situation will differ. “It is always important to talk to your banker, financial advisor, or even the FDIC directly for more personal guidance,” explains Koontz.
The FDIC is there for your benefit. When you appreciate how it works, you can build up your financial foundation with peace of mind. Ready to get started? Open an FDIC-insured online savings account today.
1 “Most U.S. bank failures have come in a few big waves.” Pew Research Center, Washington, D.C. (April 11, 2023) https://www.pewresearch.org/short-reads/2023/04/11/most-u-s-bank-failures-have-come-in-a-few-big-waves/
Articles may contain information from third parties. The inclusion of such information does not imply an affiliation with the bank or bank sponsorship, endorsement, or verification regarding the third-party or information.
Source: discover.com
Panuwat Dangsungnoen
During the initial wave of the banking crisis in March, I published “Truist: Immense Unrealized Bond Losses Threaten Core Equity Stability.” At the time, Trust Financial Corp. (NYSE:TFC) had suffered the most significant drawdown among the top-ten US banks. Roughly five months ago, I was among the few analysts with a definitively bearish outlook on the bank, while many had viewed it as a dip-buying opportunity. My perspective was that although TFC’s “bank run” risk was low, the vast extent of its off-balance sheet losses left it with little safety for a potential rise in loan losses. Further, I expected that growing net interest margin pressures would substantially lower the bank’s income over the coming year, potentially compounding its risks.
Since then, TFC has declined by an additional ~11% in value and recently retraced back near its May bottom, associated with the failure of the Federal Republic. I believe the most recent wave of downside in at-risk banks is a notable signal that the market continues to underestimate systemic US financial system risks. Of course, following TFC’s most recent bearish pattern, I expect many investors to increase their position, viewing the company as significantly discounted. Accordingly, I believe it is an excellent time to take a closer look at the firm to estimate better its discount potential or the probability of Truist facing much more significant strains.
On the surface, TFC appears to have considerable discount potential. The stock’s TTM “P/E” is 6.3X compared to a sector median of 8.7X. Its forward “P/E” of 7.7X is also below the banking sector’s median of 9.3X. TFC’s dividend yield is currently at 7.2%, nearly twice as much as the sector median of 3.7%. Finally, its price-to-book is 0.66X, considerably lower than the sector median of 1.05X. Based on these more surface-level valuation metrics, TFC appears to be around trading around a 25% to 35% discount to the banking sector as a whole. Of course, we must consider whether or not this apparent discount is pricing for the bank’s elevated risk compared to others.
Importantly, Truist is one of the most impacted banks by the increase in long-term securities interest rates, giving the bank huge unrealized securities losses. Based on its most recent balance sheet (pg. 12), we can see that Truist has about $56B in held-to-maturity “HTM” agency mortgage-backed-securities “MBS” at amortized cost, worth ~$46B at fair value, giving Truist a $10B loss that is not accounted for in its book value. That figure has remained virtually unchanged since its Q4 2022 earnings report through Q2 2023; however, it will rise with mortgage rates since higher rates lower the fair value of MBS assets. Truist’s Q2 report also notes that all of its HTM MBS securities are at due over ten years, meaning they’re likely ~20-30 year mortgage assets that carry the most significant duration risk (or negative valuation impact from higher mortgage rates).
Significantly, the long-term Treasury and mortgage rates have risen in recent weeks as the yield curve begins to steepen without the short-term rate outlook declining. See below:
From the late 2021 lows through the end of June, the long-term mortgage rate rose by around 4%, lowering Truist’s MBS HTM assets fair value by ~$10B, while its available-for-sale securities lost ~$11.9B in value (predominantly due to MBS assets as well). Accordingly, we can estimate that the duration of its securities portfolio (almost entirely agency MBS) is roughly $5.5B in estimated losses per 1% increase in mortgage rates. Since the end of June, mortgage rates have risen by approximately 35 bps, giving TFC an estimated Q3 securities loss of ~$1.9B. Around $1B should show up on TFC’s balance sheet and income, while ~$900M will remain unrealized based on its current AFS vs. HTM portioning.
For me, we must value TFC accounting for both. Total unrealized losses and estimated losses based on the most recent changes in long-term interest rates. That said, should mortgage rates reverse lower, Truist should not have that $1.9B estimated securities loss in Q3; however, should mortgage rates continue to rise, the bank should post an even more considerable securities loss. At the end of Q2, Truist had a tangible book value of $22.9B. After accounting for unrealized losses, that figure would be around $12.9B. After considering the losses associated with the recent mortgage rate spike, its “liquidation value” is likely closer to $11B. Of course, Truist has a massive ~$34B total intangibles position due to goodwill created in its acquisition spree over the past decade. Although relevant, I believe investors should be careful in accounting for goodwill due to the general decline of the financial sector in recent years.
While much focus has been placed on unrealized securities losses, the risk associated with those losses is vague. Truist can borrow money from the Federal Reserve at par against those assets, partially lowering the associated liquidity risk. However, the Fed’s financing program is at a much higher discount rate (compared to deposit rates) and only lasts one year, so it is not a permanent solution. Further, the unrealized securities losses are on held-to-maturity assets, meaning it will recoup the losses should the assets be held to maturity. Of course, that means it may take 20-30 years, and Truist may need that money before then.
Further, Truist has a substantial residential mortgage portfolio at a $56B cost value at the end of Q2 (data on pg. 48). Those loans had an annualized yield of 3.58% in 2022 and 3.77% in 2023; since the yield did not rise proportionally to mortgage rates, we know the vast majority of those loans are likely fixed-rate long-term. Since they’re not securities positions, Truist need not publish their changes in fair value; however, should Truist look to sell its residential mortgages, they would almost certainly sell at a similar total discount to its MBS assets, considering its yield level is akin to that of long-term fixed-rate mortgages before 2022. I believe the unrealized loss on those loans is likely around $10B.
The rest of Truist’s loan portfolio, worth $326B at cost, is predominantly commercial and industrial ($166B), “other” consumer ($28B), indirect auto ($26.5B), and CRE loans ($22.7B). Excluding residential mortgages, all of its loan portfolio segments have yields ranging from 6-8% (excluding credit cards at 11.5%), with those segments’ total yields rising by around 3-4% from June 2022 to 2023. Accordingly, it is virtually certain that most of its non-mortgage loans are either short-term or fixed-rate since their yields rose with Treasuries, meaning they do not likely face unrealized losses based on the increase in rates.
Overall, I believe that if Truist were to liquidate its assets, its net equity value for common stockholders would be roughly zero, technically $1B. That figure is based on its current tangible book value, subtracting known unrealized losses on securities (~$10B), estimated recent Q3 realized and unrealized losses (~$1.9B), and estimated unrealized mortgage residential loan losses (~$10B). While the bank does have some MSR assets, worth ~$3B, that are positively correlated to rates, I do not believe that segment will offset unrealized losses in any significant manner. Together, those figures equal its tangible book value and would lower the total book value to about $34B. However, in my view, intangibles are not appropriate to account for today because virtually all banks have lost value since its 2019 merger, making its goodwill an essentially meaningless figure.
From a NAV standpoint, TFC is not trading at a discount and is most likely trading at a significant premium. Further, based on these data, Truist is, in my view, seriously undercapitalized. Although TFC posts a CET1 ratio of 9.6%, which is also relatively low, its common tangible equity would be essentially zero if its loans and securities were all accounted for at fair value. To me, that is important because most of its losses are on ultra-long-term assets so it may need that lost solvency sometime before those assets’ maturity. Further, even its 9.6% CET1 ratio is close to its new regulatory minimum of 7.4%, so a slight increase in loan losses or a realization of its estimated ~$22B in unrealized losses would quickly push it below the regulatory minimum.
To me, Truist is not a value opportunity because it is not discounted to its tangible NAV value. Even its market capitalization is around 65% above its tangible book value, which does not account for its substantial unrealized losses. However, many investors are likely not particularly concerned with its solvency, as that could not be a significant issue if there are no increases in loan losses, declines in deposits, or sharp NIM compression. If Truist can maintain solid operating cash flows, that could compensate for its poor solvency profile.
Of course, TFC cannot continue to try to expand its EPS by increasing its leverage since it is objectively overleveraged, nearly failing its recent stress test. On that note, poor stress test results are essential, but “passing” is somewhat inconsequential, considering most of the recently failed banks would have passed with flying colors, as the test does not account for the substantial negative impacts of unrealized losses on fixed-income assets. That is likely because, when “stress testing” was designed, it was uncommon for long-term rates to spike with inflation as it had, and banks had much lower securities positions compared to loans. Thus, it is quite notable that TFC nearly failed a test that does not account for its substantial unrealized losses.
Looking forward, I believe it is very likely that Truist will face a notable decline in its net interest income over the coming year or more. Fundamentally, this is due to the decrease in Truist’s deposits, total bank deposits, and the money supply. As the Federal Reserve allows its assets to mature, money is effectively removed from the economy; thus, total commercial bank deposits are trending lower. Truist’s deposits are trending lower in line with total commercial banks. I expect Truist’s deposits to continue to slide as long as the Federal Reserve does not return to QE. As Truist competes for a smaller pool of deposits, its deposit costs should rise faster than its loan yields. Today, we’re starting to see the spread between prime loans and the 3-month CD contract, indicating that bank NIMs are declining. See below:
Truist’s core net interest margin has slid from 3.17% in Q4 2022 to 3.1% in Q1 2023 to 2.85% in Q2. Truist’s deposits (10-Q pg. 48) have generally fallen faster than its larger peers, so it needs to increase deposit costs more quickly. Over the past year, its total interest-bearing deposit rate rose from 14 bps to 2.19%, with the most significant rise in CDs to 3.73%.
Notably, Truist has increased its CD rate to the 4.5% to 5% range to try to attract depositors. However, the bank continues not to pay any yield on the bulk of its savings account products, causing a sharp increase in customers switching toward the many banks which pay closer to 5% today. Over the past year, the bank saw around $10B in outflows for interest-bearing deposits and about $25B from non-interest-bearing deposits, making up for those losses with new long-term debt and CDs. Problematically, that means Truist is rapidly losing more-secure liabilities to more fickle ones like CDs and the money market. While this effort may slow the inevitable decline of its NIMs, it will also increase Truist’s solvency risk because it’s becoming more dependent on less secure liquidity sources as people move money between CDs more frequently than opening and closing savings accounts at different banks.
Truist also faces increased expected loan losses due to a rise in late payments last quarter. That trend is correlated to the increase in consumer defaults and the sharp decline in manufacturing economic strength. See below:
Consumer defaults remain normal, but I believe they will rise as consumer savings levels continue to fall and should accelerate lower with student loan repayments. The low PMI figure shows many companies face negative business activity trends, increasing future loan loss risks on Truist’s vast commercial and industrial loan book. Of course, Truist also has a notable CRE loan portfolio, which faces critical risks associated with that sector’s colossal decline this year.
Overall, I believe Truist has become even more undercapitalized since I covered it last. I also think Truist faces an increased risk of recession-related loan losses and has a more sharp NIM outlook. Even more significant increases in mortgage rates recently exacerbated strains on its capitalization, while its low savings rates should cause continued deposit outflows. Further, its increased CD rates should create growing negative net interest income pressure.
If there was no recessionary potential, as indicated by the manufacturing PMI, then TFC may manage to get through this period without severe strains; however, its EPS should still decline significantly due to rising deposit costs. That said, if Truist’s loan losses continue to grow due to increasing consumer and business headwinds, its low tangible capitalization leaves it at high risk of significant downsides. If its loan losses grow or its deposits decline, it will need to realize more losses on its assets, quickly pushing its CET1 ratio below its new regulatory minimum. Personally, I strongly expect TFC’s CET1 ratio will fall below the 7.5% level over the next year and could fall even lower if a more severe recession occurs.
I am very bearish on TFC and do not believe there is any realistic discount potential in the stock besides that generated by speculators. Since there is a significant retail speculative activity in TFC and some potential for positive government intervention due to its larger size, I would not short TFC. Although TFC downside risk appears significant, many factors could create sufficient temporary upside that it is not worth short–selling. That said, I believe Truist may be the most important financial risk in the US banking system due to its solvency concerns combined with its size and scope. Accordingly, regardless of their position in TFC, investors may want to keep a particularly close eye on the company because it may create more extensive financial market turbulence than seen from First Republic Bank should it continue to face strains.
Source: seekingalpha.com
When it comes to your money, safety first. Understand what bank accounts are FDIC-insured to ensure your deposits are protected.*
August 16, 2023
Bank failures aren’t common—but they can happen, typically when a bank is no longer able to cover its liabilities. If depositors get nervous about the viability of their bank, they might withdraw money en masse, known as a bank run. Bank runs can accelerate a bank’s failure, and ultimately the Federal Deposit Insurance Corporation (FDIC) will take control of the bank.
But depositors can rest easy if their bank is FDIC-insured. FDIC insurance is a program managed by an independent agency of the United States government designed to protect customers in the event of bank failure. The standard FDIC insurance amount is $250,000 per depositor, per insured bank, per account ownership category. That maximum amount of $250,000 applies for each bank you have a qualified account with, as long as the bank is an FDIC member. (Discover Bank is an FDIC member.)
So, what bank accounts are FDIC-insured? If you’re opening a bank account, it’s important to understand what FDIC insurance is and what it covers.
The Banking Act of 1933 was passed in response to the bank failures of the Great Depression. In addition to other reforms, the act created the Federal Deposit Insurance Corporation. In 1935, the government made the FDIC permanent and tightened its standards.
Banks must be able to prove that they meet certain eligibility requirements to qualify for FDIC insurance, which is funded by payments from covered banks. In the rare event of a bank failure, those funds are used to reimburse the insured accounts of customers at that bank, with certain limits and restrictions.
Today, FDIC deposit insurance covers up to $250,000 per depositor, per insured bank, for each account ownership category. Coverage wasn’t always that high, however.
When the FDIC was established, accounts were only insured up to $2,500. Over the course of the century, the covered amount was gradually raised in an attempt to keep pace with inflation. According to the FDIC, the most recent coverage increase occurred in response to the 2008 financial crisis, when the covered amount went from $100,000 to the current $250,000.
You can increase your FDIC coverage by opening multiple account ownership categories at the same bank. For example, if you open a business account and a personal checking account at the same bank, each would be covered up to the maximum per law.
A joint bank account, meanwhile, will also be insured separately from a single-ownership account and for each owner of the account. That means if you open an individual checking account and a joint checking with your partner, those two accounts would qualify for $750,000 of total insurance.
Note, however, that this applies to different ownership categories but not to all different types of accounts. That means an individual savings account and an individual checking account belonging to the same owner at the same bank will qualify for a total of $250,000 in FDIC insurance.
Checking accounts at FDIC-insured institutions are among the deposit products covered by FDIC deposit insurance, according to the FDIC. For your checking account to be eligible, there’s nothing you need to do. The funds you deposit into a checking account at an FDIC-insured bank are automatically protected up to the maximum per law.
All savings accounts offered by FDIC-insured institutions, including online savings accounts, are covered up to the maximum per law. For all FDIC-covered accounts, both the original deposit amount and the accrued interest within the limit will be protected.
When opening an online account, it’s especially important to double-check that the type of account you’re opening is FDIC-insured. For example, according to the FDIC, crypto savings accounts are not protected by FDIC insurance, even if offered by an institution that is otherwise FDIC-eligible.
Legitimate financial institutions should make clear which accounts are FDIC-insured on their websites. To be certain, always contact the financial institution directly.
High-yield savings accounts at FDIC-insured institutions are protected up to the maximum per law, according to the FDIC. If the interest on a savings account causes it to grow beyond $250,000, only the funds up to the limit will be guaranteed protection.
As with checking accounts, if you want to protect more than $250,000 in savings, you’ll need to open accounts under different ownership categories or have accounts at multiple banks.
According to the FDIC, funds deposited into money market accounts offered by FDIC-insured institutions are protected up to the maximum per law, just like FDIC-insured savings accounts.
Money market mutual funds, however, are not protected by the FDIC. Why not? Money market accounts are a type of savings account, while money market mutual funds are a type of investment account. Investments are generally not eligible for FDIC protection.
Certificates of deposit at insured institutions are covered by the FDIC up to the maximum per law.
A CD can offer better rates than a high-yield savings account, but CDs work a little differently than savings accounts. With a CD, your money is earning interest at a fixed, guaranteed rate, but if you withdraw the money before the end of its term, you may pay a penalty.
IRAs, or Individual Retirement Accounts, are also covered up to the maximum per law at FDIC-insured institutions.
For an account to be covered, it generally needs to be “self-directed,” meaning the account holder chooses how their contributions are applied. This could include 401(k)s offered through a job or IRA saving accounts that you choose to open on your own.
IRAs can also include CDs and money market accounts. Retirement CDs, money market accounts, and similar financial products are eligible for coverage.
While stock and bond investments are a common feature of many retirement plans, they are not eligible for FDIC coverage. That means it’s possible that only a portion of your 401(k) or IRA will be covered.
If you’re uncertain if a retirement account or asset is covered, check with the institution providing it.
It’s possible to increase your coverage by creating a revocable trust account with multiple beneficiaries.
Trusts are accounts that pay out to a designated beneficiary or beneficiaries after the account holder passes. FDIC coverage applies to each beneficiary for up to five beneficiaries. In other words, a trust account with one owner and five beneficiaries could be covered up to $1,250,000.
If the trust is jointly held between two owners, the FDIC will provide up to $250,000 in coverage per beneficiary per account holder. That means if you want to maximize your coverage to the absolute limit, it would be possible to create a jointly held trust with five beneficiaries insured up to $2,500,000 in total.
It’s important to note that this information is all according to FDIC rules taking effect on April 1, 2024. Under current rules, irrevocable trusts, which cannot be altered after they’re created, can only be insured up to $250,000 regardless of the number of beneficiaries. The new rules treat both types of trusts identically and add the five beneficiary cap for calculating coverage.
Because we’re talking about potentially millions of dollars, it’s all the more essential to consult a financial planning professional about your personal situation.
While FDIC insurance limits have been set at $250,000 since 2008, it’s always possible that the insurance limit could be increased in 2023 or down the road, according to Bankrate.
Whether or not that happens in the near future will likely depend on how the current economic and political situation unfolds. If the past decades are any indication, Congress will probably need to raise the limit eventually to account for inflation and other factors. But it’s unclear when that might happen, and savers shouldn’t assume it will be any time soon.
You can contact the FDIC if you have any questions or use their coverage calculator to determine how much of your funds are insured.
Opening an account with an FDIC-insured institution is a wise decision. But bank failures are just one risk to manage. You might also worry about scammers and fraudsters who want access to your hard-earned cash. Learn how to protect your bank account from fraud in 6 steps.
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Source: discover.com
Fraud attempts on mortgage payoffs increased by five times in the second quarter versus the prior three months, and based on July’s data, that elevated pace is still ongoing, CertifID found.
Among the causes is the disruption in the banking industry caused by three high profile failures earlier this year, which resulted in shifts in deposit relationships.
The change opened the door for the fraudsters, explained Thomas Cronkright, the co-founder and executive chairman at CertifID.
The fraud prevention company unveiled its PayoffProtect verification product last September. In the second quarter, PayoffProtect caught $12 million of fraudulent payoffs, up from just $1.9 million in the first quarter.
The crisis at Silicon Valley Bank, the first high profile failure, happened on March 10. That started a chain of events where depositors pulled money from similarly situated depositories, which later also resulted in the closures of Signature Bank and First Republic Bank.
And within that transfer of liquid assets is where the fraudsters are able to find an opening. They pretend to be the entity receiving the payoff and contact the party responsible for moving the funds, saying they had previously been using a community bank.
The perpetrators claimed that they instead had established a new relationship with another bank and the funds needed to be sent to accounts there that they controlled. “There was a ton of that going on during this period that we reported against,” Cronkright said.
And because this was tied to an ongoing news story, victims had their guard down.
Higher home values are playing into the opportunity. “The title settlement industry handles a lot of payments where the buyer is receiving a substantial net proceeds amount, but it pales in comparison to the mortgage obligations that are satisfied at closing,” Cronkright said. And at the end of the first quarter, total mortgage debt outstanding was over $12 trillion.
It is not just the old line attributed to Willie Sutton about robbing banks because it’s where the money is, but another adage as well, which is that these fraudsters never retire a successful scam, Cronkright said.
It’s easy for the criminal to impersonate the borrower and obtain loan payoff information. And on the other end, institutions need to be more diligent in verifying where the funds are being transferred to. In one case, CertifID had the fraudulent information and used it to test a financial institution and four times a bank employee said the data was correct, Cronkright said.
Once they find success, the crooks are able to “layer in” and set up multiple transactions where they attempt to divert funds, he continued.
And this is just another flavor of the same business email compromise scams, which have plagued all sorts of commerce in recent years. Later, when they have indications that the transaction is progressing, a fraudster is able to imitate the borrower or another legitimate party.
Real estate related complaints reported to the Federal Bureau of Investigation about business email compromise schemes resulted in a record amount of dollar losses, $446.1 million, and the second-most ever number of incidents, 2,284, during 2022. And mortgage fraud experts agree that those totals are likely understatements of the size of the problem.
Mortgage payoffs represented 24% of cases and 47% of losses reported to CertifID’s fraud recovery services last year. Its State of Wire Fraud report found $1.4 billion or over 340,000 suspect wire transactions during 2022.
Another reason for the uptick is that fraud prevention firms have developed better detection tools, so more incidents are being reported, Cronkright said.
He has a second point of view on this, as Cronkright is also an owner of Sun Title Agency, where he has to manage against this very risk.
“You’re managing it on a transaction-by-transaction basis, and we have seen the movement across the financial markets and deposit accounts,” Cronkright said.
The upheaval in banking has people in that business asking, “Are we done yet? And we’re good for now or are we going to continue to see a lot of that depository movement?” he asked rhetorically.
Source: nationalmortgagenews.com
Amid the fallout of the Silicon Valley Bank and Signature Bank collapses in March, depositors looked for safer places for their savings, and big banks benefited from some customer flows during the flight to safety. Earnings for JP Morgan Chase and Wells Fargo also beat expectations, easing concerns about the health of the country’s banking system.
Deposits at Bank of America were above $1 trillion for the seventh straight quarter, posting $1.91 trillion in the first quarter of 2023, down 1% from $1.93 trillion during the same quarter in 2022.
Consumer banking division posted a net income of $3.1 billion, a 13.1% decline from the previous quarter’s $3.58 billion, but still up 4.4% from the previous year’s $3 billion, according to its filing with the Securities and Exchange Commission (SEC).
“We had a great quarter for our micro products (…) We have positive returns there. So mortgages, credit, munis, financing, futures, FX, all of them had a pretty good quarter,” Alastair Borthwick, Bank of America’s chief financial officer, told analysts.
Its mortgage business, however, reported disappointing numbers, an issue led by elevated 30-year fixed mortgage rates.
Mortgage originations totaled $3.9 billion during the first quarter, a 25% drop from $5.2 billion posted in the second quarter, and 76.2% below the $16.4 billion in the first quarter of 2022.
BofA’s production decline follows the track of JPMorgan Chase and Wells Fargo, which also posted double-digit mortgage loan production decreases during the first quarter.
The bank’s home equity originations remained flat in the first quarter, posting $2.6 billion from the previous quarter. That’s up from the first quarter of 2022, when BofA originated $2.0 billion in home equity loans.
Bank of America had $229.3 billion in outstanding residential mortgages on its books through March 31, down from $229.4 billion from Q4 2022 and $224 billion in the first quarter of 2022.
The home equity portfolio was $26.5 billion at the end of the first quarter, down from $27 billion from the previous quarter — and a decline from $$27.8 billion a year prior.
Bank of America’s total mortgage-backed securities reached a $32.1 billion fair value as of March 31, compared to $32.5 billion as of December 31, 2022.
Looking forward, Borthwick expected the Federal Reserve to raise interest rates one more time, followed by a couple of cuts this year.
“That obviously assumes our current client positioning and the forward rate expectations. We continue to expect modest loan growth (…) driven by credit card, and to a lesser degree, commercial,” Borthwick said.
The bank expects further Fed balance sheet reductions to continue to reduce deposits for the industry, leading to lower deposits and rotational shifts.
Source: housingwire.com
First Quarter 2023
Economic History
Americans take today’s selection of mortgages for granted, but financing a home is a much different experience than it was a century ago
The furniture industry was booming in Greensboro, N.C., 100 years ago. A furniture craftsman making a solid, steady income might have wanted to buy a home and build up some equity. But the homebuying process then looked very little like it does today. To finance that purchase, the furniture maker first would need to scrape together as much as 40 percent for a down payment, even with good credit. He might then head to a local building and loan association (B&L), where he would hope to get a loan that he would be able to pay off in no more than a dozen years.
Today’s mortgage market, by contrast, would offer that furniture maker a wide range of more attractive options. Instead of going to the local B&L, the furniture maker could walk into a bank or connect with a mortgage broker who could be in town or on the other side of the country. No longer would such a large down payment be necessary; 20 percent would suffice, and it could be less with mortgage insurance — even zero dollars down if the furniture maker were also a veteran. Further, the repayment period would be set at either 15 or 30 years, and, depending on what worked best for the furniture maker, the interest rate could be fixed or fluctuate through the duration of the loan.
The modern mortgage in all its variations is the product of a complicated history. Local, state, national, and even international actors all competing for profits have existed alongside an increasingly active federal government that for almost a century has sought to make the benefits of homeownership accessible to more Americans, even through economic collapse and crises. Both despite and because of this history, over 65 percent of Americans — most of whom carry or carried a mortgage previously — now own the home where they live.
Prior to 1930, the government was not involved in the mortgage market, leaving only a few private options for aspiring homeowners looking for financing. While loans between individuals for homes were common, building and loan associations would become the dominant institutional mortgage financiers during this period.
B&Ls commonly used what was known as a “share accumulation” contract. Under this complicated mortgage structure, if a borrower needed a loan for $1,000, he would subscribe to the association for five shares at $200 maturity value each, and he would accumulate those shares by paying weekly or monthly installments into an account held at the association. These payments would pay for the shares along with the interest on the loan, and the B&L would also pay out dividends kept in the share account. The dividends determined the duration of the loan, but in good economic times, a borrower would expect it to take about 12 years to accumulate enough money through the dividends and deposits to repay the entire $1,000 loan all at once; he would then own the property outright.
An import from a rapidly industrializing Great Britain in the 1830s, B&Ls had been operating mainly in the Northeast and Midwest until the 1880s, when, coupled with a lack of competition and rapid urbanization around the country, their presence increased significantly. In 1893, for example, 5,600 B&Ls were in operation in every state and in more than 1,000 counties and 2,000 cities. Some 1.4 million Americans were members of B&Ls and about one in eight nonfarm owner-occupied homes was financed through them. These numbers would peak in 1927, with 11.3 million members (out of a total population of 119 million) belonging to 12,804 associations that held a total of $7.2 billion in assets.
Despite their popularity, B&Ls had a notable drawback: Their borrowers were exposed to significant credit risk. If a B&L’s loan portfolio suffered, dividend accrual could slow, extending the amount of time it would take for members to pay off their loans. In extreme cases, retained dividends could be taken away or the value of outstanding shares could be written down, taking borrowers further away from final repayment.
“Imagine you are in year 11 of what should be a 12-year repayment period and you’ve borrowed $2,000 and you’ve got $1,800 of it in your account,” says Kenneth Snowden, an economist at the University of North Carolina, Greensboro, “but then the B&L goes belly up. That would be a disaster.”
The industry downplayed the issue. While acknowledging that “It is possible in the event of failure under the regular [share accumulation] plan that … the borrower would still be liable for the total amount of his loan,” the authors of a 1925 industry publication still maintained, “It makes very little practical difference because of the small likelihood of failure.”
Aside from the B&Ls, there were few other institutional lending options for individuals looking for mortgage financing. The National Bank Act of 1864 barred commercial banks from writing mortgages, but life insurance companies and mutual savings banks were active lenders. They were, however, heavily regulated and often barred from lending across state lines or beyond certain distances from their location.
But the money to finance the building boom of the second half of the 19th century had to come from somewhere. Unconstrained by geographic boundaries or the law, mortgage companies and trusts sprouted up in the 1870s, filling this need through another innovation from Europe: the mortgage-backed security (MBS). One of the first such firms, the United States Mortgage Company, was founded in 1871. Boasting a New York board of directors that included the likes of J. Pierpont Morgan, the company wrote its own mortgages, and then issued bonds or securities that equaled the value of all the mortgages it held. It made money by charging interest on loans at a greater rate than what it paid out on its bonds. The company was vast: It established local lending boards throughout the country to handle loan origination, pricing, and credit quality, but it also had a European-based board comprised of counts and barons to manage the sale of those bonds on the continent.
During the 1930s, the building and loan associations began to evolve into savings and loan associations (S&L) and were granted federal charters. As a result, these associations had to adhere to certain regulatory requirements, including a mandate to make only fully amortized loans and caps on the amount of interest they could pay on deposits. They were also required to participate in the Federal Savings and Loan Insurance Corporation (FSLIC), which, in theory, meant that their members’ deposits were guaranteed and would no longer be subject to the risk that characterized the pre-Depression era.
The B&Ls and S&Ls vehemently opposed the creation of the FHA, as it both opened competition in the market and created a new bureaucracy that they argued was unnecessary. Their first concern was competition. If the FHA provided insurance to all institutional lenders, the associations believed they would no longer dominate the long-term mortgage loan market, as they had for almost a century. Despite intense lobbying in opposition to the creation of the FHA, the S&Ls lost that battle, and commercial banks, which had been able to make mortgage loans since 1913, ended up making by far the biggest share of FHA-insured loans, accounting for 70 percent of all FHA loans in 1935. The associations also were loath to follow all the regulations and bureaucracy that were required for the FHA to guarantee loans.
“The associations had been underwriting loans successfully for 60 years. FHA created a whole new bureaucracy of how to underwrite loans because they had a manual that was 500 pages long,” notes Snowden. “They don’t want all that red tape. They don’t want someone telling them how many inches apart their studs have to be. They had their own appraisers and underwriting program. So there really were competing networks.”
As a result of these two sources of opposition, only 789 out of almost 7,000 associations were using FHA insurance in 1940.
In 1938, the housing market was still lagging in its recovery relative to other sectors of the economy. To further open the flow of capital to homebuyers, the government chartered the Federal National Mortgage Association, or Fannie Mae. Known as a government sponsored-enterprise, or GSE, Fannie Mae purchased FHA-guaranteed loans from mortgage lenders and kept them in its own portfolio. (Much later, starting in the 1980s, it would sell them as MBS on the secondary market.)
In 1940, about 44 percent of Americans owned their home. Two decades later, that number had risen to 62 percent. Daniel Fetter, an economist at Stanford University, argued in a 2014 paper that this increase was driven by rising real incomes, favorable tax treatment of owner-occupied housing, and perhaps most importantly, the widespread adoption of the long-term, fully amortized, low-down-payment mortgage. In fact, he estimated that changes in home financing might explain about 40 percent of the overall increase in homeownership during this period.
One of the primary pathways for the expansion of homeownership during the postwar period was the veterans’ home loan program created under the 1944 Servicemen’s Readjustment Act. While the Veterans Administration (VA) did not make loans, if a veteran defaulted, it would pay up to 50 percent of the loan or up to $2,000. At a time when the average home price was about $8,600, the repayment window was 20 years. Also, interest rates for VA loans could not exceed 4 percent and often did not require a down payment. These loans were widely used: Between 1949 and 1953, they averaged 24 percent of the market and according to Fetter, accounted for roughly 7.4 percent of the overall increase in homeownership between 1940 and 1960. (See chart below.)
Demand for housing continued as baby boomers grew into adults in the 1970s and pursued homeownership just as their parents did. Congress realized, however, that the secondary market where MBS were traded lacked sufficient capital to finance the younger generation’s purchases. In response, Congress chartered a second GSE, the Federal Home Loan Mortgage Corporation, also known as Freddie Mac. Up until this point, Fannie had only been authorized to purchase FHA-backed loans, but with the hope of turning Fannie and Freddie into competitors on the secondary mortgage market, Congress privatized Fannie in 1968. In 1970, they were both also allowed to purchase conventional loans (that is, loans not backed by either the FHA or VA).
A decade later, the S&L industry that had existed for half a century would collapse. As interest rates rose in the late 1970s and early 1980s, the S&Ls, also known as “thrifts,” found themselves at a disadvantage, as the government-imposed limits on their interest rates meant depositors could find greater returns elsewhere. With inflation also increasing, the S&Ls’ portfolios, which were filled with fixed-rate mortgages, lost significant value as well. As a result, many S&Ls became insolvent.
Normally, this would have meant shutting the weak S&Ls down. But there was a further problem: In 1983, the cost of paying off what these firms owed depositors was estimated at about $25 billion, but FSLIC, the government entity that ensured those deposits, had only $6 billion in reserves. In the face of this shortfall, regulators decided to allow these insolvent thrifts, known as “zombies,” to remain open rather than figure out how to shut them down and repay what they owed. At the same time, legislators and regulators relaxed capital standards, allowing these firms to pay higher rates to attract funds and engage in ever-riskier projects with the hope that they would pay off in higher returns. Ultimately, when these high-risk ventures failed in the late 1980s, the cost to taxpayers, who had to cover these guaranteed deposits, was about $124 billion. But the S&Ls would not be the only actors in the mortgage industry to need a taxpayer bailout.
By the turn of the century, both Fannie and Freddie had converted to shareholder-owned, for-profit corporations, but regulations put in place by the Federal Housing Finance Agency authorized them to purchase from lenders only so-called conforming mortgages, that is, ones that satisfied certain standards with respect to the borrower’s debt-to-income ratio, the amount of the loan, and the size of the down payment. During the 1980s and 1990s, their status as GSEs fueled the perception that the government — the taxpayers — would bail them out if they ever ran into financial trouble.
Developments in the mortgage marketplace soon set the stage for exactly that trouble. The secondary mortgage market in the early 2000s saw increasing growth in private-label securities — meaning they were not issued by one of the GSEs. These securities were backed by mortgages that did not necessarily have to adhere to the same standards as those purchased by the GSEs.
Freddie and Fannie, as profit-seeking corporations, were then under pressure to increase returns for their shareholders, and while they were restricted in the securitizations that they could issue, they were not prevented from adding these riskier private-label MBS to their own investment portfolios.
At the same time, a series of technological innovations lowered the costs to the GSEs, as well as many of the lenders and secondary market participants, of assessing and pricing risk. Beginning back in 1992, Freddie had begun accessing computerized credit scores, but more extensive systems in subsequent years captured additional data on the borrowers and properties and fed that data into statistical models to produce underwriting recommendations. By early 2006, more than 90 percent of lenders were participating in an automated underwriting system, typically either Fannie’s Desktop Underwriter or Freddie’s Loan Prospector (now known as Loan Product Advisor).
Borys Grochulski of the Richmond Fed observes that these systems made a difference, as they allowed lenders to be creative in constructing mortgages for would-be homeowners who would otherwise be unable to qualify. “Many potential mortgage borrowers who didn’t have the right credit quality and were out of the mortgage market now could be brought on by these financial-information processing innovations,” he says.
Indeed, speaking in May 2007, before the full extent of the impending mortgage crisis — and Great Recession — was apparent, then-Fed Chair Ben Bernanke noted that the expansion of what was known as the subprime mortgage market was spurred mostly by these technological innovations. Subprime is just one of several categories of loan quality and risk; lenders used data to separate borrowers into risk categories, with riskier loans charged higher rates.
But Marc Gott, a former director of Fannie’s Loan Servicing Department said in a 2008 New York Times interview, “We didn’t really know what we were buying. This system was designed for plain vanilla loans, and we were trying to push chocolate sundaes through the gears.”
Nonetheless, some investors still wanted to diversify their portfolios with MBS with higher yields. And the government’s implicit backing of the GSEs gave market participants the confidence to continue securitizing, buying, and selling mortgages until the bubble finally popped in 2008. (The incentive for such risk taking in response to the expectation of insurance coverage or a bailout is known as “moral hazard.”)
According to research by the Treasury Department, 8 million homes were foreclosed, 8.8 million workers lost their jobs, and $7.4 trillion in stock market wealth and $19.2 trillion in household wealth was wiped away during the Great Recession that followed the mortgage crisis. As it became clear that the GSEs had purchased loans they knew were risky, they were placed under government conservatorship that is still in place, and they ultimately cost taxpayers $190 billion. In addition, to inject liquidity into the struggling mortgage market, the Fed began purchasing the GSEs’ MBS in late 2008 and would ultimately purchase over $1 trillion in those bonds up through late 2014.
The 2008 housing crisis and the Great Recession have made it harder for some aspiring homeowners to purchase a home, as no-money-down mortgages are no longer available for most borrowers, and banks are also less willing to lend to those with less-than-ideal credit. Also, traditional commercial banks, which also suffered tremendous losses, have stepped back from their involvement in mortgage origination and servicing. Filling the gap has been increased competition among smaller mortgage companies, many of whom, according to Grochulski, sell their mortgages to the GSEs, who still package them and sell them off to the private markets.
While the market seems to be functioning well now under this structure, stresses have been a persistent presence throughout its history. And while these crises have been painful and disruptive, they have fueled innovations that have given a wide range of Americans the chance to enjoy the benefits — and burdens — of homeownership.
READINGS
Brewer, H. Peers. “Eastern Money and Western Mortgages in the 1870s.” Business History Review, Autumn 1976, vol. 50, no. 3, pp. 356-380.
Fetter, Daniel K. “The Twentieth-Century Increase in U.S. Home Ownership: Facts and Hypotheses.” In Eugene N. White, Kenneth Snowden, and Price Fishback (eds.), Housing and Mortgage Markets in Historical Perspective. Chicago: University of Chicago Press, July 2014, pp. 329-350.
McDonald, Oonagh. Fannie Mae and Freddie Mac: Turning the American Dream into a Nightmare. New York, N.Y.: Bloomsbury Publishing, 2012.
Price, David A., and John R. Walter. “It’s a Wonderful Loan: A Short History of Building and Loan Associations,” Economic Brief No. 19-01, January 2019.
Romero, Jessie. “The House Is in the Mail.” Econ Focus, Federal Reserve Bank of Richmond, Second/Third Quarter 2019.
Rose, Jonathan D., and Kenneth A. Snowden. “The New Deal and the Origins of the Modern American Real Estate Contract.” Explorations in Economic History, October 2013, vol. 50, no. 4, pp. 548-566.
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Source: richmondfed.org
A “share certificate” is the credit union equivalent of a bank certificate of deposit (CD).
Share certificates have a fixed annual percentage yield (APY) for a fixed period.
Share certificates can offer better rates than “share accounts,” which correspond with bank savings accounts.
A share certificate can be a good option for earning interest on cash you’ll want to use in the future.
A share certificate is a type of savings account with a fixed APY for a fixed period. Credit unions offer share certificates. They’re equivalent to certificates of deposit (CDs), which you can get at banks. Think of a share certificate as a credit union CD.
While share certificates are equivalent to CDs, share accounts at a credit union are similar to savings accounts at a bank. Here are some critical differences between share certificates and share accounts:
Higher APYs. Share certificates usually offer a higher APY than share accounts, but a share certificate requires that you keep your money in the account for the entire period you selected.
Fixed APYs. For that period, your share certificate will earn a fixed APY. On the other hand, the APY of a share account can change from time to time, so the rate of earnings (called “dividends”) you get can change.
No access to funds. If you withdraw your money from a share certificate before the end of its fixed term, you may have to pay a penalty fee. With a share account, you can add or withdraw funds when you need.
Credit unions use the term “share” because members (that is, depositors) at a credit union are part owners of the institution. Just as stockholders have a share of stock in a company, credit union members have share accounts or share certificates in a credit union. Your earnings from a share certificate are called “dividends,” equivalent to “interest” earned from a bank.
In the context of investing, a share certificate is a legal document that proves you own some stock (that is, a share of ownership) of a company. The company issues it to the shareholder; a “share certificate” is synonymous with a “stock certificate” in investing terms.
A share certificate works this way: You choose a term (length of time) to open and deposit money into the account. Sometimes a minimum opening deposit is required.
Once you’ve deposited funds and the term begins, you cannot add or withdraw any funds until the term has ended (or “matured”). You may have to pay a penalty if you withdraw your money before the certificate term ends.
While your money is kept with the credit union, the credit union will pay you dividends. Dividends may be compounded daily or monthly (learn more about compound earnings).
When your share certificate matures at the end of the term, you can either roll your certificate funds into another share certificate (using the CD ladder strategy), transfer your money to a checking or share account, or withdraw your money.
Source: nerdwallet.com
Bloomberg News
Washington regulators are encouraging banks and credit unions to test their ability to borrow from emergency lending facilities regularly to ensure they are able to access liquidity in a pinch.
The Federal Reserve, Federal Deposit Insurance Corp., Office of the Comptroller of the Currency and National Credit Union Administration issued guidance Friday on how depositories should “regularly evaluate and update their contingency funding plans.”
Both Silicon Valley Bank and Signature Bank struggled to use the Fed’s discount window in March amid significant upticks in depositors’ withdrawal requests. Regulators have concluded that better preparation likely would not have saved the banks from failure, given the size of their respective runs, but their guidance notes that the episode “underscored the importance of liquidity risk management and contingency funding planning.”
Friday’s guidance is the first formal recommendation on last-resort borrowing since the bank failures, but Fed officials have called on banks to be more proactive in their discount window preparations in recent months. On Wednesday, Fed Chair Jerome Powell discussed the topic during his post-Federal Open Market Committee meeting, noting that the process can be “clunkier” than banks anticipate.
“Banks are now working to see that they are ready to use the discount window, and we are strongly encouraging them to do that — banks broadly,” Powell said, adding that depositories should be “much more ready” to access liquidity than they have been.
The guidance notes that banks should familiarize themselves with the operational steps required to borrow from the discount window as well as the NCUA’s credit liquidity facility. It also calls for reviewing and revising contingency funding plans “periodically and frequently.”
The agencies encouraged banks to have renewed contacts with emergency lenders, including the Fed and the Federal Home Loan banks, the latter of which is often seen as a more preferable source of emergency funds.
Advances from Home Loan banks carry less of a stigma than discount window loans, but they can be harder for banks to access on short notice. Home Loan banks impose caps on how many advances member banks can take out and they accept different types of collateral. Officials at the Federal Reserve Bank of New York said a misunderstanding of the differences between the two facilities contributed to Signature’s difficulties.
The guidance also encourages depositories to “pre-pledge” collateral to the discount window, if they are relying on it as a source of emergency liquidity. The process involves drawing up contracts for assets to be transferred to the facility ahead of time so the transaction can be executed more quickly.
“Depository institutions that include the discount window as part of their contingency funding plan should also consider conducting small value transactions at regular intervals to ensure familiarity with discount window operations,” the document notes.
Regulators also noted that credit unions should be aware of the distinct features of the Central Liquidity Facility, which is housed within the NCUA but has shared ownership between member institutions and the government. Credit unions with $250 billion of assets or more must have access to at least one federally backed liquidity source — either the Central Liquidity Facility or the discount window.
Source: nationalmortgagenews.com