Monitoring Risks with Certificates of Deposit

Monitoring Risks with Certificates of Deposit

Government entities are permitted to invest in Certificates of Deposit (CDs) that are “fully insured” by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA). Each depositor has up to $250,000 of federal deposit insurance coverage at each individual bank or credit union. Since the FDIC and NCUA insure not only the principal but accrued interest as well, government entities should purchase CDs in amounts just less than the $250,000 limit, so that accrued interest is protected.

Often, government entities will use brokers, banks and certificate-of-deposit placement services to purchase CDs. When purchasing multiple CDs, it is imperative that a government entity set up a system to monitor all CDs purchased to ensure that the total purchased from any given bank or credit union does not exceed the FDIC or NCUA limit. Purchasing multiple CDs from a bank or credit union that together exceed the federal deposit limit will result in losses to the government entity should that bank or credit union fail.

Date this Avoiding Pitfall was most recently published: 09/06/2024