What Is a Collateralized Certificate of Deposit?

by Chris Ciaccia ; Updated July 27, 2017

A certificate of deposit (CD) is an instrument offered by a bank that guarantees the depositor a rate of return if they hand over their money to the bank for a set time period. In collateralized CDs, banks set aside Treasury securities or other qualified collateral to secure a jumbo deposit in excess of the limit covered by the Federal Deposit Insurance Corporation (FDIC).

Function

If a local government has money in an institution over the FDIC limit ($100,000), the local government is supposed to make sure that the institution pledges the institution's own securities as collateral for the deposit, usually government securities.

Features

The collateral pledges two ways. The government unit and the institution can enter into an agreement in which the institution pledges securities to secure only that local government's deposits. The second way is to have the institution pledge a pool of securities to secure the deposits on a joint basis.

Considerations

Once the pledge is approved by the institution's board of directors or loan committee, there are some things you need to know. The market value has to be tested frequently and should be at least equal to the amount of the deposits plus accrued interest. Make sure the pledged securities are government securities, and make sure to request monthly reports on the amount of your deposit, the identity and value of the collateral.

References

About the Author

Chris Ciaccia is a former oil and gas hedge fund analyst who has been writing since 2008. He has been published in "Miner's Choice" and online at BenZinga. He graduated from Seton Hall with a Bachelor of Science in business administration and finance and a minor in communications.