The worst has happened. That high-flying little savings and loan paying you a great yield has been shut down. What do you do?
Many institutions paying high rates are on shaky ground. They pay that kind of interest to attract deposits to keep themselves afloat.
If yours goes under, don't panic. The worst that can happen is a delay in getting your money and a loss of interest for a couple weeks, so long as you remain within the $100,000 limit on insured deposits imposed by the Federal Deposit Insurance Corp. for banks and the Federal Savings and Loan Insurance Corp. for thrifts.
An example of what happens in a failure was demonstrated earlier this month when FSLIC paid out a record $1.35 billion to insured depositors who had been lured by high rates to two thrifts in Costa Mesa, North America Savings & Loan and American Diversified Savings.
Federal regulators say closing the institutions was part of a drive to curb high-paying thrifts and help restore the industry to health. But analysts say they expect little or no impact on CD rates because the two Orange County thrifts represented such a tiny fraction of the nation's high-yield deposits.
The FDIC and FSLIC deal with failed institutions similarly. Each divides failures into three categories, and each category carries a different nuisance and cost value for the consumer.
In most cases, the entire failed institution, including deposits and loans, will be purchased by another institution or new investors. A bank or thrift may close on Friday and reopen Monday under a new name with new owners. The accounts are automatically transferred.
The new owners agree to continue all deposits under the existing terms. Customers will probably be notified by mail by the new owners of the change and it's business as usual.
In the second type of closing, regulators cannot find a buyer for the entire institution, so just the insured deposits are transferred to a healthy bank or thrift. The new institution will pay off insured funds without any early withdrawal penalty, or you can leave them there.
Here's the rub: The new institution can drop the interest rate on the account if it is out of line with what others are paying in the area. You get some notice, usually 30 days, before the interest is cut and can move your money elsewhere, again without penalty.
FSLIC is trying to avoid these drops by persuading takeover institutions to honor the terms of the dead thrift. The FDIC is less likely to do so.
In the smallest category of failures, no buyer wants even the insured deposits and the FDIC or FSLIC must pay off the insured depositors. This is the scenario where consumers run the most risk, but it still is not a big one.
Interest stops accruing the day the regulators shut down the institution. The place usually reopens the following day with a staff from the regulatory agency on hand to pay off insured depositors. Be prepared to show proof of identity.
For people who do not come in, the regulators send a claim form to every insured depositor notifying them of the failure. The depositor signs the form and mails it back. The check will come in the return mail.
This can all take a couple of weeks, and no interest is being paid. But it is still better than watching your savings slide away in a bear market.