FDIC Press Release on Bank Rate Restrictions for Floundering Banks

The FDIC has just made a press release entitled, FDIC to Tighten and Clarify Interest Rate Restrictions on Institutions That are Less Than Well-Capitalized.  The releases is regarding an FDIC proposal to reign in banks that are classified as less than Well Capitalized from attracting depositor funds with above average market interest rates.  The intentions of the proposal can be summoned by the quote from the FDIC Chairman Sheila Bair, “Our expectation is that this additional concreteness would result in lower deposit rates being paid by a number of banks that are less than Well Capitalized …”

In a nutshell, the FDIC is clearly concerned that these less than Well Capitalized banks are aggressively capturing depositors by marketing above average yields.  Bank rates that are higher than the regional and national averages for these particular banks has two potentially negative consequences.  The first consequence is that these banks have a fairly high probability of being taken over by the FDIC regardless of the deposit base.  Working with the merger of a failing bank into a better capitalized bank is only complicated for the consumer and the FDIC when the bank has a deposit base that is artificially inflated with high rate accounts.  The second issue is that these banks now drive up the cost of funds for other banks by raising the bar for the top bank rates in the regions where the banks that are less then Well Capitalized banks serve. 

If one were to look back at some of the highest CD rates offered in the lat year, a number of banks on the list of the best CD rates were banks destined for failure.  Downey Savings, Washington Mutual, Wachovia, National City Bank all spring to mind quickly and all of these banks were offering some of the best CD rates in the past 12 months.  Of course, all of these banks no longer exist in their original form.  Coincidently, each one of these institutions were very heavily weighted in the residential mortgage market.  The banks that have been merged into healthy banks are no longer popping up on the list of the best CD rates either under the banks original name or that of the controlling bank.  Clearly allowing banks that are in or on the verge of financial trouble attract deposits with high interest rates is detrimental to a sound banking market.  The current list of banks offering the highest CD rates surely contains banks that will not exist in their current form by the end of 2009.

The main component of the press releases clarifies the proposal and its foundation and reads as follows:

Prompt Corrective Action requires the FDIC to prevent banks that are less than Well Capitalized from soliciting deposits at interest rates that significantly exceed prevailing rates.  The FDIC’s current regulation ties permissible interest rates paid by these banks on deposits solicited nationally to the comparable maturity Treasury yield, and ties permissible interest rates on deposits solicited locally to undefined prevailing local interest rates.

The proposed regulation would define nationally prevailing deposit rates as a direct calculation of those national averages, as computed and published by the FDIC based on data available to it.  Reliance on the Treasury yields in the regulation would be discontinued.  In recognition of the blurring of local deposit market boundaries brought about by the Internet and other innovations, the proposed regulation would also establish a presumption that locally prevailing deposit rates equal the national rates published by the FDIC.  This presumption could be overturned by evidence presented by banks to the FDIC.

The FDIC points out that this proposed rule will only apply to a small amount of the total number of FDIC insured banks that are labeled as less than well capitalized.  Per the FDIC, as of third quarter 2008, there were 154 banks that reported being less than Well Capitalized.  This is out of a total of more than 8,300 banks nationwide.

Tags: bank rates, Banks, CD rates, FDIC

This entry was posted on Tuesday, January 27th, 2009 at 2:37 pm and is filed under Money Rates. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.