Dedicated to Deposits: Deals, Data, and Discussion

FDIC Proposes Interest Rate Restrictions on Weak Banks

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The FDIC just issued this press release regarding newly proposed interest rate restrictions for banks that are considered less-than-well capitalized. Unfortunately, this may lead to lower deposit rates. However, there aren't many less-than-well-capitalized banks. The FDIC says there were only 154 banks out of 8,300 banks nationwide with this designation as of third quarter 2008. But I have a feeling this number will be going up.

Another thing I found interesting in the press release is that the FDIC is recognizing how banks can easily offer deposit products nationwide. Here's an excerpt:
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.

The FDIC has often restricted weak banks from offering brokered deposits. As I described in this 2008 post, regulators see brokered deposits as hot money deposits that are more volatile than a bank's core deposits. But online savings accounts can also be volatile. It's easy for customers to electronically transfer their money out of an internet bank that drops its rates too low. I like this freedom, but I could see how regulators may look at restricting internet rates from weak banks.


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Comments
20 Comments.
Comment #1 by Anonymous posted on
Anonymous
If they restrict interest rates at weaker banks, expect a wave of outgoing funds out from the bank. Only the diehard customers will stick with them.

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Comment #2 by Anonymous posted on
Anonymous
Limiting the interest rates they could pay out would only accelerate their deaths.

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Comment #3 by Anonymous posted on
Anonymous
I see the FDIC's point, but when it starts to regulate rates it makes one think that that's the first step toward nationalization of the banks.

Most banks give as little interest as they can get away with, anyway, so that their executives and stockholders can prosper. The stockholders don't always prosper but it certainly seems as though the executives do. Why doesn't the FDIC limit compensation to them if it wants to help banks' bottom lines?

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Comment #4 by Anonymous posted on
Anonymous
Speaking of stockholder, have you seen the current prices of bank companies now? Many are coming close to becoming penny stock securities. If you buy at these low prices and then they recover later, you can make out like a bandit.

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Comment #5 by Anonymous posted on
Anonymous
It certainly would put an end to any new funds coming into those banks. And would, like already stated, most likely accelerate their demise.

It's all has to do with the risk/reward ratio. Which if the reward isn't there, it would certainly be not worth the high risk to put new money into a very weak bank.

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Comment #6 by Anonymous posted on
Anonymous
"make out like a bandit"?

Too many bandits out there now!

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Comment #7 by Anonymous posted on
Anonymous
I believe the intent is to protect taxpayers. The FDIC is left holding the bag, so to speak, when a weak bank offering extravagant deposit rates subsequently goes under. As a depositer, I welcome the high rates; as a taxpayer, I abhor the banks' lack of accountability.

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Comment #8 by Chris Ronk (anonymous) posted on
Chris Ronk
Just one step closer to nationalization. Who does this actually help anyway?

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Comment #9 by Z (anonymous) posted on
Z
" as a taxpayer, I abhor the banks' lack of accountability."

They are accountable to their shareholders, and perhaps to honor their contractual obligations. No one else. What does taxpayers have to do with it? FDIC provides deposit insurance by imposing a fee on bank deposits.

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Comment #10 by Anonymous posted on
Anonymous
"They are accountable to their shareholders, and perhaps to honor their contractual obligations. No one else. What does taxpayers have to do with it? FDIC provides deposit insurance by imposing a fee on bank deposits."

In case you've not been following developments of the past year, taxpayers have shouldered the bailout of the failing banking sector, the existence of shareholders notwithstanding.

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Comment #11 by marc (anonymous) posted on
marc
I totally agree with Anonymous, at 3:59 PM, January 27, 2009. I have been saying for a while that FDIC insurance on bad banks like Wamu offering 5% rates insured by the FDIC just before dying in a last-ditch effort to save themselves allows borrowers to essentially invest in junk bonds with no risk. I like it (I have one of those 13 mo. Wamu CDs), but it's wrong and hurts the good banks that are forced to match rates to keep their deposit base.

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Comment #12 by Anonymous posted on
Anonymous
This proposed FDIC policy is a HUGE ISSUE, the ramifications of which are just beginning to be explored by the 11 comments to date.

I suspect it will cause more banks to fail faster, when they might otherwise survive.

It will certainly drive generalized bank interest rates lower, but will CD monies remain in the banks if the government keeps pushing them down?

If CD monies leave banks, where will they go? Back into housing priced at less than the cost of rebuilding? Some where else? Into individual "safer" stocks with historical rising dividends and low debt to equity ratios? And are such alternate investment places better for the economy in the short and/or long run?

Pushing the retired etc. out of government guaranteed FDIC/NCUA deposits could further weaken the banking system by reducing a source of funds.

In a society with fewer traditional pensions and more and more 401 k's, it is in my opinion at least worth thinking about whether the government should be overly aggressive in killing so-called weaker banks. This is especially the case since the Obama administration is still developing its policies about bank survival, etc.

I know I am missing a lot at this time, except for the fact that--in my opinion--this proposed FDIC policy ought not to be rammed through without prior extensive discussion.

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Comment #13 by Anonymous posted on
Anonymous
Yes, I think that is just what our government is trying to do. Force people's money out of safe FDIC bank deposits into the fickle stock market in order to prop it up. Then watch $$$$ vanish.

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Comment #14 by Anonymous posted on
Anonymous
I recall that in the 1960s and 1970s all banks paid the same interest on their passbook savings accounts. I believe it was 5.25% in the 1970s. Was this uniformity in rates the result of government regulation or was it simply the result of collusion among the banks?

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Comment #15 by Anonymous posted on
Anonymous
The way the release is worded is a little confusing to me. I read it that restrictions will be removed, so banks may be able to actually increase rates and become more competitive. This bestcashcow submitter reads it the same way.
http://www.bestcashcow.com/savings_-_checking_-_cds/article/andys2i/savings-account-rates-set-to-increase

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Comment #16 by Banking Guy (anonymous) posted on
Banking Guy
The bottom of the press release has a quote from the FDIC Chairman:

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 and closer adherence to the statute.

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Comment #17 by Meliorist (anonymous) posted on
Meliorist
Any bank can be run like a ponzi scheme right now: offer higher rates, (term) deposits flow in, place it all on black and if you lose, increase rates again and get even more money and continue. When they're making money on their "investments" they'll be able to pay themselves large "well deserved" bonuses.

This is a baby step in the right direction, because most banks are insolvent right now and set up to lose money, not make it. The sooner they die, the less times they get to double down, the less society loses and the sooner our economy can be realigned with reality.

That said, the real long term solution is to institute a 100% reserve on demand deposits (likely involving fees) and make that the only assets covered by FDIC insurance (ie, fraud/theft coverage). Let the CD holders (like me) take some risk (private insurance) with their rewards. Smart banks would open their books to woo investors and insurance providers and be much more transparent in general...rates at banks in general would jump through the roof.

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Comment #18 by Anonymous posted on
Anonymous
A local community bank in my area got notified last year about being severely undercapitalized. It seems that they also were involved with subprime mortgages. One of the local counties (my zip code included) has the highest foreclosure rate in the state). This bank never offered very high rates and never advertised (though they do have a website). So it looks like quite a few small community banks were into these no documentation loans just like the big boys. The one difference is that if they are in deep trouble and can't find a buyer, the FDIC will probably shut them down pretty quick. Their parking lots have always been empty whenever I go past their offices, but I guess some local people must be customers of theirs. I would be wary of any small community bank offering very high rates at this point. If they go into receivership, expect delays in getting your money out. It would be the first bank closure in my area in over 15 years.

http://www.baltimoresun.com/business/bal-te.bz.bank27jan27,0,5662520.story

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Comment #19 by Anonymous posted on
Anonymous
To Anonymous at 4:53 AM, January 28, 2009

Passbook savings account rates were set by the Federal Government as I recall. The Savings and Loans were under Federal regulations to set a specific rate based on some kind of formula. As far I can recall, no S & L would have rates below or above this specific number.

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Comment #20 by Anonymous posted on
Anonymous
Once again it is the consumer who will lose.  Since the "big four" dominate the statistical model used to calculate the national rate they will be able to control rates.  In most markets the "big four" offer a fraction of the rate offered by community banks because they have access to global money markets.  Amazingly the taxpayer lent the "big four" billions of dollars, the "big four" then turn around and lower grandma's CD rate.  Now that's power!  Editorial note - we are either the most generious people on the face of the earth or the most gullible.   

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