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Your Take: FDIC Sets Bank Interest Rate Caps

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Federal Deposit Insurance Corporation SealNear the end of May, the FDIC Board of Directors approved a rule that capped the interest rate “less than well capitalized institutions” could offer. For quite some time they listed weekly national rates. It was only until last month did they institute rate caps, which are defined as 75 basis points above the national rate. The national rate is just the simple average of rates paid by all insured depository institutions and branches for which data are available.” If a region has a much higher prevailing rate, then banks in that region will be allowed to use local averages plus 75 basis points as the rate cap. This rule wouldn’t go into effect until January 1, 2010.

The idea is that a bank that isn’t well capitalized will be in dire need of some liquidity and boosting your rates is a great way to increase deposits but put you in a difficult spot down the road. When Washington Mutual offered 5% APY certificates of deposit, everyone knew that it was a play for deposits. This rule would make that impossible.

What do you think? Is this a good idea or a bad idea? Do you think that the government is overstepping?

Incidentally, the current rate cap, effective 6/8/2009, on a savings account is 0.96% and a 12 month CD is 1.98% APY. Those are some pretty sad rates.

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19 Responses to “Your Take: FDIC Sets Bank Interest Rate Caps”

  1. Lucy says:

    I think this should be a great opportunity for well capitalized banks that can maintain competitive rates. The savers will defect no-longer competitive banks in droves and flock to the remaining banks that offer good rates.

    What disturbs me about the new FDIC rule is: internet banks and brick & mortar banks are lumped together. Of course the average national rates are much much lower because the B&M banks drag them down. These 2 types of banks have different operational expenses and should not be compared like this.

    And, what about rewards deposit accounts? FDIC does not take those into account either. And the business model behind rewards accounts are actually extremely viable, in my opinion.

    • Jim says:

      You’re right about the internet banks vs. b&m banks rates being different, I’m interested to see how that starts working itself out. Same for reward deposit accounts too, they don’t have average rates for those.

  2. Mark says:

    Nice to see the FDIC finally do something right.
    The FDIC is almost out of insurance money and more banks need to fail.
    The system will not function correctly until the debt that must be defaulted is defaulted.

    • Jim says:

      The underlying debt is still there regardless of the interest rates, so while the cap is probably a good idea, I don’t see it solving the underlying problem. I agree with you though, the current approach appears to be pulling the band-aid off slowly when a lot of people want us to just rip the dang thing off quickly.

  3. Lynn says:

    While I think it may be a good idea, I think its going to hurt the bad banks especially since .75% above average is nothing great. I have money in a Citibank ultimate savings that is currently 1.4% (this is unfortunately my main bank) and I will pull it out if the rate is capped. I am of course assuming Citi will still be a “bad” bank come January. Even when ING was 6% years ago, the average savings account rate was probably only 1%. When the rates go back up this is definitely going to hurt the banks. But like Mark said, maybe these banks just need to fail.

  4. nickel says:

    Interesting. While the intention seems to be to reduce risk to the FDIC (by discouraging last minute deposits in bad banks), it looks to me like this has the potential to actually trigger the death of those banks.

    In the wake of the stress tests, a number of banks have been told to raise capital. How are they going to make that happen if they can’t make their offerings more competitive?

  5. Andrew says:

    I think this is a very good idea. In the absence of insurance, markets would do a very good job of setting interest rates; those banks that had a higher risk of failing would have to offer higher rates to entice depositors. But now, there’s zero risk that I’ll lose my money in any bank, so I just put it where it pays the most, regardless of how sound that bank is. It’s a recipe for disaster.

  6. Lucy says:

    I must be the only one who hates the new FDIC imposed new rates. Why does no one else seems to object to the (very) low rates forced on banks effective Jan 2010? It’s tough being a saver when the FDIC further cuts down deposit rates when they’re already extremely low.

    I’m not saying the FDIC is wrong to impose rate limitations, mind you. Just the fact that the agency is not distinguishing between internet vs. B&M, and regular accounts vs. rewards account. So, savers end up with a raw deal.

  7. Wizard Prang says:

    So where is the rate cap on Credit Card interest?

    Didn’t think so :)

  8. Chris S says:

    THIS IS NOT A NEW RULE, JUST AN AMENDMENT TO CLARIFY HOW TO CALCULATE DEPOSIT RATE RESTRICTIONS. I am a bank examiner, and rate restrictions for institutions that are less than well-capitalised have been in place since the late 80′s, early 90′s and were enacted as part of Prompt Corrective Action legislation. However, since times have been relatively good for the past 20 years, no one has really had to apply the rule.

    The regulation was amended to clarify how to calculate the restrictions because, as I know from experience, the original rules were very vague and difficult to apply.

  9. Chris S says:

    If you read the press release, the first line says the FDIC is amending the rule, not enacting a new one.

  10. Andrew says:

    Provided that issuers aren’t allowed to raise your rates retrospectively (which they were until the new law), the market can set credit card interest rates just fine. If you know that your rate is going to be x% and it will take you y years to pay off the debt, you can factor that into your decision to take on the debt or not.

  11. Bradford says:

    Just how many banks would be affected? Elsewhere I read (on the BankDeals site?) that something like 248 out of 8200 institutions would currently qualify for the cap, but memory made have played tricks with those numbers.

    Maybe there’s something to say for watching bank ratings and their criteria.

  12. thomas says:

    I wish they would just stay out of it. They have their hands full already with FDIC and whatnot.

    As also mentioned, online banks have much less costs and can offer higher rates than B&M stores.

  13. I am for free enterprise– capping the rates is wrong.

    My feeling is that capping the rates will speed the demise of some institutions which I feel the regulators want. I think they are using the current weak economy to selectively clean house . . .

    • Andrew says:

      You have it backwards. Capping the rates will prevent failing institutions from offering high rates to attract new depositors, and then using the new depositors’ money to pay off the old depositors who are fleeing for higher rates elsewhere. Besides, the rate caps apply only to insolvent or near-insolvent institutions. Strong banks are free to pay what they wish. Of course, they don’t pay much because they don’t have to. That’s the free market at work.

  14. Vic says:

    Doesn’t make any difference to me. Credit Unions are giving better rates anyway and are not governed my the FDIC.

  15. William says:

    While well intended, the rule is not based in the real world. What will happen to existing customers (of banks to ehich this would apply)is that they will find their banks either precipitously dropping rates (often without notice) or being unable to accept funds into accounts that had been paying a somwhat advantageous rate, causing intended deposits to be turned away, thus creating operational nightmares for bank depositors. From my conversations with a number of bankers, auditors and examiners (who choose to remain anonymous) I am convinced there is an unwritten mandate to squeeze smaller banks out of business, leaving only the ‘too big to fail banks’ that will either become semi-nationalized or buoyed by taxpayer dollars.


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