Brokered CD and Bank Failures

I wondered how long that 0-star R-G Premier Bank of Puerto Rico would last (see previous post Treasure Hunting in Secondary CDs). Now I know the answer: six months.

Last week, the regulators closed R-G Premier Bank of Puerto Rico together with two other banks in Puerto Rico, Westernbank and Eurobank. Before they were closed, all three banks consistently offered the highest yield on brokered CDs at Vanguard, E*Trade and other brokers who get their brokered CD listings from BondDesk Group.

I bought the R-G Premier CD on the secondary market through Fidelity. I knew it was a weak bank when I bought the CD. So I made sure that I paid below the face value. Its failure actually would give a small boost to my expected yield.

Fidelity hasn’t yet credited my account with the full face value plus accrued interest through the date of the closure, but I’m not too worried. I expect the credit in the next week or so.

With the small discount at the time of purchase and the interest I already received, my return over the six months holding period would be about 3.0% annualized when the face value is finally credited to me. Not bad for a six-month CD. However, if I reinvest the payout into a new CD, the rate is somewhat lower now.

After the failure of those three banks in Puerto Rico, Puerto Rican banks continue to offer the highest yield on brokered CDs through BondDesk. The table below shows the top 1-, 2-, 3-, and 5-year new-issue brokered CDs at Fidelity, Schwab, and Vanguard as of yesterday. The star ratings are from BauerFinancial.

  Fidelity Schwab Vanguard
1 year 0.55%
Bank of America
(3-star)
0.60%
Ally Bank
(3-star)
0.80%
Firstbank, PR
(2-star)
2 years 1.30%
Bank of America
(3-star)
1.30%
Bank of America
(3-star)
1.60%
Doral Bank, PR
(0-star)
3 years 2.00%
Bank of America
(3-star)
2.00%
Bank of America
(3-star)
2.15%
Doral Bank, PR
(0-star)
5 years 2.75%
CIT Bank
(3-star)
2.70% 
Barclays Bank
(3-star)
3.00%
Doral Bank, PR
(0-star)

Is it worth it to squeeze out up to 0.3% a year buying CDs from a weaker bank in Puerto Rico, especially from a 0-star bank? You will have to be comfortable with the answer yourself. If you know what you are getting into and you don’t mind a surprise early payout, it’s fine. The CDs are still FDIC insured. If you dislike hassle, I wouldn’t recommend it.

Unless you absolutely have to hold CDs in a brokerage account, brokered CDs aren’t that great to begin with, let alone from a weak bank. Retail CDs bought directly from a bank or credit union usually have a higher yield and a low cost early-withdrawal option.

For a more complete write-up on short-term fixed income instruments – Treasuries, bond funds, bond ETFs, direct, brokered, and secondary CDs, please read my previous post Short-Term Fixed Income: CDs vs Bond Funds.

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Comments

  1. Dan says

    For those of us that have 72t accounts that need to generate income and aren’t allowed to contribute nor withdraw funds because of SEPP requirements, brokered CDs are GREAT!! Broadway Bank was just closed by the banking regulators, and I received the funds in my Schwab Bank and purchased another the same day @ 4.3% (Bank of Oklahoma) to replace it. I don’t know how I would have found the new CD without going thru my broker.

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