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). Each depositor has up to $250,000 of FDIC coverage at any individual bank. Since the FDIC insures not only the principal but accrued interest as well, government entities should purchase CDs in amounts just less than the FDIC limit, so that accrued interest is protected.
Often, government entities will use brokers, banks and certificate-of-deposit placement services to purchase CDs. As a result, it is imperative that a government entity investing in CDs set up a system to monitor all CDs purchased to ensure they do not exceed the FDIC limit at any given bank. Purchasing multiple CDs from a bank that together exceed the FDIC limit will result in losses to the government entity should that bank fail.
Date this Avoiding Pitfall was most recently published: 07/17/2020