Some struggling banks will soon have to limit CD rates and interest paid on other deposit products as the FDIC tightens its regulatory grip on institutions it considers less than well-capitalized.
Effective Jan. 1, 2010, any bank the agency classifies as adequately capitalized or undercapitalized will not be able to pay more than 75 basis points above what the FDIC determines is the national rate on certificates of deposit, money market accounts and savings accounts.
If the agency determines that the national rate is lower than the prevailing rate in a particular market, the bank will be able to pay 75 basis points above the prevailing rate. Well-capitalized banks are not subject to the ruling.
Each week the FDIC publishes a chart of the national rates and the rate caps. For the week of Nov. 30, 2009, the interest rate on a standard one-year CD tops out at 1.71 percent. On the day this story was written, 17 of the 37 banks listed on Bankrate's high-yield, one-year CD chart were paying more than 1.71 percent. This isn't to say that any of those banks are less than well-capitalized, but if they were they'd have to reduce their rate next year.
Competing on ratesThe new regulation could certainly be a bitter pill for savers who have sought out banks paying above-average rates in this prolonged low-rate environment. But it could also make it difficult for banks in the targeted categories to compete, says Dan Geller, executive vice president at Market Rates Insight.
"There are nine states -- Washington, North Carolina, California, Texas, Florida, Nevada, Idaho, Oregon and Minnesota -- where the highest rates exceed the cap. That's where less-than-well-capitalized banks will find it more challenging to compete on rates.
"This is a classic case of the chicken and the egg," Geller says. "These banks need capital more than the others but they have to (compete) with one hand tied behind their back. Our studies show that less-than-well-capitalized banks do offer, on average, higher rates than other banks nationally, so the cap will impact the price leaders in the industry and that will have an impact on the national average for deposit prices."
RewardChecking to take a hit?Fortunately, there are only 552 less-than-well-capitalized banks among the 8,200 FDIC-insured banks nationwide. Nevertheless, officials at Austin, Texas-based BancVue are hoping that their product, a high-yield checking account called RewardChecking, will not be hit hard by the rate restrictions.
CEO Gabriel Krajicek has met with FDIC officials in an effort to show that BancVue's product is actually a low-cost account for a bank. While the accounts pay a comparatively high yield, customers are required to adopt certain technologies that BancVue says either generate fees for the institution or help it reduce expenses.