As I mentioned yesterday, Washington Mutual has leapfrogged ahead, raising the interest rate offered on the bank’s online savings account to 3.75% APY. I’ve updated the list of highest online savings account interest rates to reflect the current rate leader.

Here is a summary of the highest interest rates on well-known banks currently offered, as of July 31, 2008.

Washington Mutual Online Savings Account
3.75% APY

The Washington Mutual Online Savings Account is only available online, not in WaMu bank branches. If you also sign up for a WaMu Free Checking Account, you will avoid a monthly service charge of $4.00. This fee can also be avoided by maintaining a balance of at least $300 each day of the monthly statement cycle.

There is some concern about the stability of Washington Mutual considering the company’s recent losses. In fact, the bank’s need to attract capital is probably a strong driver behind the bank’s decision to raise interest rates and attract more savings customers. I wouldn’t say your money’s at risk if deposited here; the FDIC has you covered if you stay within the limits.

Some of WaMu’s deposits are held at Washington Mutual Bank fsb (Utah) with a CAEL rating of 1 (best), while some deposits are held at Washington Mutual Bank (Nevada) with a CAEL rating of 5 (worst). This rating is used to determine a bank’s stability, but a rating of 5 doesn’t guarantee a collapse and a rating of 1 doesn’t guarantee against one.

If you are interested in Washington Mutual’s Online Savings Account, apply here.

HSBC Direct Online Savings Account
3.50% APY

HSBC Direct is currently offering a “promotional” interest rate of 3.50% APY through September 15, recently extended beyond the original expiration of August 15. HSBC Direct has a track record of offering very competitive rates, and I believe that will continue when (and if) the “promotional” period ends. I have been adding more to my HSBC Direct account to take advantage of their habit of high interest rates.

Unlike Washington Mutual, HSBC Direct requires no minimum balance and has no recurring account fees.

If you are interested in HSBC Direct’s Online Savings Account, apply here.

FNBO Direct Online Savings Account
3.50% APY

FNBO Direct is a newcomer to the online banking arena having launched a little over a year ago, but the bank behind the online presence, First National Bank of Omaha, has been around since 1857 and currently has 38 branches in Nebraska, Iowa, and Texas. First National Bank of Omaha has a CAEL rating of 2 (1 is the highest rating, 5 is the lowest). This means that even though the online account is a new offering, the bank is in good shape and most likely won’t fail like others have recently.

If you’re interested in FNBO Direct’s Online Savings Account, apply here.

ShoreBank High-Yield Savings
3.50%

This account is a newcomer. ShoreBank requires no minimum balance and charges no account fees for this online account. An appealing feature is the bank’s attitude toward community development and the environment. Like most banks, ShoreBank turns a portion of deposits into loans. This bank focuses on “loans for projects that promote the efficient use of materials, resources, or alternative sources of energy, that promote the elimination of toxins, and that protect or revitalize land or water.”

If you’re interested in ShoreBank’s High-Yield Savings Account, apply here.

ING Direct Electric Orange Savings Account
3.0% APY

No list of the top online savings accounts is complete without ING Direct. They are no longer the interest rate leader, offering only 3.0% APY. In fact, it’s been some time since ING Direct has been at the top of any interest rate list, but there are several reasons to include them here. They were one of the first banks to popularize the idea of high-yield online-only savings accounts. ING Direct still maintains one of the strongest presences thanks to a vast customer base, good customer support, and a sensible and simple website.

Even though the advertised interest rate is lower than others, new customers can greatly increase their effective interest rate by grabbing a $25 bonus for opening an account. The bonus will work for anyone who opens the account with $250 and leaves at least $250 in the account for 30 days. If you deposit that initial $250 and nothing else for the year, the interest you earn, because the bonus is considered interest income, will amount to 13.3% APY. I can bet you that rate is unbeatable. Of course, that’s 13.3% on only $275. If your initial deposit is higher, or if you add money throughout the year, your effective interest rate will gradually decline back down towards 3.0%.

ING Direct has no minimum balances or account fees.

If you’re interested in ING Direct’s Electric Orange Savings Account, apply here. However, if you want to see if you qualify for a $25 account opening bonus, find out here.

Starting tomorrow, Washington Mutual is increasing the interest rate offered on its online savings account to 3.75% APY. This jump will put this account on top among the best-known online savings accounts. This is a wide enough margin over ING Direct to convince me to open an account and give it a try even though I’m far from a “rate-chaser.”

I foresee more interest rate increases in the near future.

The FDIC has announced that two more banks failed yesterday, bringing the total this year to seven. 1st National Bank of Nevada and First Heritage Bank operate a total of 28 branches in Nevada, Arizona, and California. Neither of these banks was included in the list of the top ten banks likely to fail.

Account holders in these two banks will be able to access their money through check writing and ATM withdrawals throughout the weekend, even beyond the FDIC limits.

On Monday, the two banks will be known as “Mutual of Omaha Bank” and customers will have access to their full balances. The ease of the takeover operation brings to mind the idea that “money” is often nothing more than data bits. A computer at a bank where I hold an account keeps a database record with my balance, and that database record can be moved from one place to another. “Money” as we know it isn’t involved in the slightest.

FDIC shutters two more regional banks, CNN Money, July 26, 2008

I received an email to inform me that HSBC Direct has extended its “promotional” interest rate on the online savings account of 3.5% APY to September 15, increasing this promotion by one month.

I’m not sure what the difference is between a “promotional” rate and any other rate; as always, interest rates on savings account are subject to change at any time. Perhaps HSBC Direct has simply planned when it will lower its rates while other banks generally keep that information private until the change occurs.

3.5% is the best rate you can get right now for internet-based savings accounts backed by major financial institutions. This rate would put HSBC Direct at the top of the list, but I’m keeping them listed with their last known non-promotional rate.

HSBC Direct does not offer a referral program, however. When you open an account at ING Direct, you can earn a $25 bonus immediately (accessible after 30 days) simply using a referral link generously offered by Consumerism Commentary readers (and one-time visitors). Keep in mind you need to open the account with an intial deposit of at least $250, and keep your money there for a month.

I’ve updated the list of referral links to include some new ones as each link can only be used once.

Without getting too specific about the company I work for, a large company like mine has to make efficient use of its financial assets. Most of a company’s money should be invested in bonds, equities, or even more complex financial instruments, but a portion needs to be in regular deposit accounts like savings and certificates of deposit to maintain liquidity. The best strategy when dealing with millions of dollars in CDs is to distribute the money across a large number of banks across the country. As I mentioned earlier, as long as a bank is insured by the Federal Deposit Insurance Corporation (FDIC), the money is safe, up to $100,000 per depositor per account.

The FDIC does more than protect up to $100,000, and the details are important.

At any particular bank, single accounts—that is, not joint accounts—are insured up to $100,000 in total. For example, if you have three accounts, one checking account with $3,000, one savings account with $50,000, and one CD with $25,000, you’re under your limit. If your total money held in single accounts at that bank exceeds $100,000, only $100,000 is protected (though the FDIC will do its best to provide access to all of your funds if the need arises).

There is a “danger” with CDs, as well as savings account, when it comes to interest earned. If you have maximized your coverage with a CD whose balance is $100,000, the interest you earn would put you over the limit once the bank credits your account. The risk of never seeing that money is very low, but it’s important to be aware that you would be over the limit if you receive $5,000 in interest on that $100,000 CD. Large companies with accounts at the limit might have instructions to wire interest to another bank to avoid surpassing the FDIC limit, but individual accounts are normally not granted this feature.

If you have joint accounts at the bank, they are also insured up to $200,000 in total. If you are listed as the account’s owner in conjunction with just one other person, such as your husband or wife, then you’re protected for half of the account’s total, up to $100,000, and your joint owner is protected for the other half.

Couples can also set up a trust for children or another relative, insured by the FDIC up to $600,000. The FDIC also insures retirement accounts held at banks. That includes IRAs, Keogh plans, and self-directed 401(k)s up to a total of $250,000.

Keep in mind that the FDIC does not insure mutual funds, annuities, bonds, or Treasury bills, even if you purchased the investments at an FDIC-insured bank. That doesn’t mean that your money isn’t safe. The Securities Investor Protection Corporation (SIPC) is an organization that protects stocks and bonds from failures in which these assets can become “lost” and from brokers who steal customers’ funds. If your investments simply lose money as many do in the market, the loss is not covered by SIPC.

One thing to watch out for is the difference between “money market accounts” (MMAs) and “money market funds” (MMFs). MMAs are deposit accounts like everyday savings accounts and function similarly. MMAs are eligible for FDIC protection if held at a bank, and they are included in the $100,000 limit with other individual savings accounts. If the MMA is held jointly, it is included in the separate limit for joint accounts. MMFs on the other hand are considered investment products and are not eligible for FDIC protection, even if held at a bank.

Even if you have deposits over the limit of FDIC’s protection, like 10,000 IndyMac customers had when that bank collapsed, the FDIC still does its best to make the excess funds available in a timely manner. In this case, the FDIC provided advances to customers for 50% of their funds deposited over the FDIC limits.

There is always a slight possibility that the entire banking system in the United States could collapse. It’s a very remote possibility, and expecting the worst would be approaching paranoia. But in this highly unlikely situation, even the FDIC might not be able to help you withdraw your funds. It’s always good to keep cash on hand as part of an emergency plan, but taking all of your money out of the banking system would be excessively paranoid.

Earlier this month, IndyMac, a bank and mortgage lender, collapsed, and through an interesting process the Federal Deposit Insurance Corporation (FDIC) assumed responsibility of the bank’s deposit accounts. This collapse, only a few months after NetBank closed and its deposits were acquired by ING Direct, has people everywhere worrying about their money. The government and consumers hope to determine which banks might be next to fail and depositors are closing their accounts, concerned they might not be able to gain access to their funds once a bank collapses.

ABC News has compiled a list of the ten most likely banks to fail next based on a ratio of the bank’s assets and reserves to its non-performing loans. Popularizing this list could feed panic, which is perhaps what the release of Senator Charles Schumer’s comments about IndyMac did in June. When Schumer’s letters expressing concern about IndyMac’s stability were released to the public the expected reaction ensued. Customers panicked and withdrew their assets from the bank, possibly expediting IndyMac’s fall.

There is no need to panic. As long as you keep less than $100,000 per legal depositor in any banking institution insured by the FDIC, you will not lose your money. Even if your bank fails, the FDIC has $53 billion in a fund set aside for covering customers in the event of a collapse. Even if you keep more than $100,000 in one bank, you will probably still have access to at least part of your money eventually. It would make sense to distribute your funds across banks at no more than $100,000 each.

While your money is safe, it wouldn’t hurt to know where your bank is on the list of those most likely to fail. Here are the ten riskiest banks based on the ratio mentioned above, the “Texas ratio.”

1. Colorado Federal Savings Bank, Greenwood Village, CO
2. Eastern Savings Bank, FSB, Hunt Valley, MD
3. Integrity Bank, Alpharetta, GA
4. Ameribank, Inc., Welch, WV
5. First Priority Bank, Bradenton, FL
6. First Security National Bank, Norcross, GA
7. Magnet Bank, Salt Lake City, UT
8. Security Pacific Bank, Los Angeles, CA
9. First National Bank of Brookfield, Brookfield, IL
10. The State Bank of Lebo, Lebo, KS

There is no guarantee that these banks will collapse in the above order, nor can anyone promise that any one bank will fail at all. I see no immediate need to move your funds to another bank if your institution is listed above unless you find yourself awake at night worrying. The FDIC has you covered as long as you’re within the correct limits.

Who’s Next? List of Troubled Banks Worries Wall Street, DC, ABC News, July 15, 2008, via Five Cent Nickel and My Two Dollars.

This is a quick Sunday night note to say that I’ve refreshed the list of $25 bonus referrals for new customers this evening. These appear to be going rather quickly and I try to keep the list updated with fresh links.

For the Orange Savings Account referrals, I have on several occasions asked readers to provide their own, as I have used all that have been allotted to me. The waiting list is closed, however, as I currently have more than enough volunteers to last a while. I will post another announcement when the waiting list is open again.

Thanks for your quick response. The waiting list is now full.

As you may know, I am allowing Consumerism Commentary to share ING Direct referral links, providing new savings account holders with a $25 bonus (and a $10 bonus to the referrer). As of right now, I’m down to four referral links for the savings account. You can find those links here.

I’m re-opening the waiting list for readers who are hoping to provide two of their referrals to other Consumerism Commentary readers. Please comment here or email me if you’d like to be added to the short waiting list. I’ll send you instructions for sending the referrals directly to Consumerism Commentary for posting.

If you’re not currently an ING Direct customer, here’s how you can earn up to $525 by opening an account.

Thanks for everyone’s quick response. The waiting list is now full. Everyone who has commented or emailed is on the waiting list and I will email you with instructions for providing me the referral links for posting.