The Federal Deposit Insurance Corp., or FDIC, is changing the way it determines the maximum interest rate that troubled banks may pay for deposits such as certificates of deposit, money market accounts and savings accounts. The institutions that fall into this category are classified as less than well-capitalized and, fortunately for consumers, there are relatively few. Well-capitalized banks can set deposit rates as they wish but rarely pay above the prevailing rates.
Banks that are less than well-capitalized include those that the FDIC classifies as adequately capitalized and undercapitalized. It appears that fewer than 250 of the more than 8,200 FDIC-insured institutions are not well-capitalized and, therefore, are subject to the FDIC's interest rate restriction regulations. But considering the current banking landscape, that number could grow significantly.
FDIC's national rateUnder the new rule, which takes effect Jan. 1, 2010, the FDIC will establish a national rate by using a "simple average of rates paid by all insured depository institutions and branches for which data are available." If the agency determines that the national rate is too low in a particular market, the affected banks will be able to pay up to 75 basis points above the prevailing rate in that market.
Brokered deposits -- CDs purchased through brokers, such as Fidelity Investments or Charles Schwab -- are also subject to rate restrictions. Undercapitalized banks are not allowed to accept brokered deposits, but adequately capitalized banks may if they have permission from the FDIC.
"Sometimes a troubled institution can jack up its interest rates to keep money coming in with the thought that they'll hit that home run and grow themselves out of their problems," says FDIC spokesman David Barr. "But what they tend to do is dig a deeper hole for the government to fix. So ever since the savings and loan crisis, there's been (an effort) to limit the loss to the Deposit Insurance Fund from bank failures."
Previously, the FDIC tied the interest rate cap to Treasury rates. That proved less than ideal in a continued low-rate environment, and in addition, critics say the rules were vague and compliance was difficult.
Michael Shumaker, an attorney with Bryan Cave in Atlanta who specializes in financial institutions and regulatory compliance, says now there's much more of a bright-line rule.
"The FDIC has declared that if you're in compliance with the national rate caps, the bank will be in a 'safe harbor.' But I think a lot of banks will still have some trepidation. A lot of banks are new to experiencing this rule at all because they're just now coming under enforcement actions.