Any piece of legislation as massive and far-reaching as the Dodd-Frank Wall Street Reform and Consumer Protection Act is bound to have some unintended consequences develop over time. Usually we think of unintended consequences as a bad thing; they're the loopholes that allow companies to get out of paying their fair share of taxes or allow some shady individuals to grab an unfair share of government benefits.
Competition for deposits is going to intensify due to the enactment of the Dodd-Frank Act pertaining to insurance fees for insured institutions. The new FDIC rule, which will take effect mid-year, will include nondeposit liabilities in the base for calculating insurance fees. The new measure will intensify the competition for retail deposit among institutions because institutions with a relatively large amount of nondeposit liabilities will see a significant increase in their insurance fees, and therefore, will strive to acquire more liquidity through retail deposits.
Basically, what this boils down to is a lot of banks had been OK with funding their operations with deposits from institutional investors and wholesale banks, even though those funds tend to be more expensive than deposits from individual investors, because at least they didn't have to pay FDIC insurance fees on those amounts.
Now, banks will have to pay FDIC insurance dues on the money they hold from wholesale banks and institutional investors, and that will make deposits from individuals, known as retail deposits, even more attractive, says Dan Geller, executive vice president for Market Rates Insight.
"Institutions will gravitate more toward retail deposits than ever before," he says.
If retail deposits are more attractive, banks will want more of them, and may be willing to raise rates to outcompete other banks for them, he says.
If Geller is right, we could see CD rates rise between now and Sept. 30, the date when banks have to pay their first FDIC insurance bills under the new rules. If that happens, it will surely be welcome news for CD investors who have been coping with record-low CD rates for months.