FDIC Rate Restrictions - Past and Future Impact?

Another headwind for deposit rates this year will be the FDIC rate caps. I haven't mentioned these caps in a while. Back in May 2009 the FDIC started to post weekly rate caps. The caps are designed to restrict interest rates for "less than well capitalized institutions". The intent is to reduce the deposits that unhealthy banks can take in and thus decrease potential losses for the FDIC if the bank fails.

Here's the link to the FDIC's weekly rate caps page. Some of the rates for non-jumbo deposits that were issued on January 3rd include:

• Savings - 0.92%
• Interest Checking - 0.85%
• 12-month CD - 1.27%
• 60-month CD - 2.32%

As you might expect, these have gone down in the last year. Here are the rate caps last year on January 4, 2010:

• Savings - 0.96%
• Interest Checking - 0.88%
• 12-month CD - 1.66%
• 60-month CD - 2.89%

More Banks May Be Affected

In the FDIC's 2009 Third Quarter report, it listed the number of problem banks at 552. In its 2010 Third Quarter report, the number has increased to 860. The FDIC's list is secret, but you can get an idea of these banks based on public enforcement actions. That's what the Calculated Risk Blog maintains, and its current unofficial problem bank list now includes 935 banks which is up from 389 in August 2009.

With more problem banks, it's likely that more are being affected by the FDIC's rate caps.

Effects on Healthy Banks?

The FDIC's rate caps may indirectly influence rates that healthy banks pay. It's an easy benchmark for banks to use. This was described in this Jumbo CD Investments CD Rates blog post. In the post, it was mentioned that they "have heard of some pressure from bank examiners telling banks, healthy or not, that they shouldn’t be paying rates higher than the cap."

Effects on Reward Checking Accounts

In November 2009 I posted a letter that a bank sent to its customers describing how the FDIC's rules were forcing it to reduce the reward checking account rates. There have been many cases in the last year when reward checking rates have plummeted to below 1.00%. It appears that the FDIC continues to group reward checking with interest checking. So a less than well capitalized bank may be forced to lower its reward checking rate to be no higher than the interest checking rate cap (which is currently 0.85%). One possible example of this happened recently at NBRS Financial. In December the bank slashed its reward checking rate from 4.01% to 0.80%. The bank didn't specifically mention being forced to make these cuts by the FDIC. The bank is operating under a Federal Reserve Cease and Desist Order.

The company that powers most reward checking accounts, BancVue, has tried to change how the FDIC's views reward checking accounts. You can read about this in their letter to the FDIC.

Other Rate Restrictions

These published rate caps may not be the only rate restrictions being forced onto banks. In May 2009, the American Bankers Association was successful in getting the FDIC to issue restrictions on Ally's deposit rates. In November 2009, the Wall Street Journal described reports of how this rate restriction was being implemented:

The FDIC asked GMAC officials to keep the rates on deposits low enough so the bank wasn't one of the nation's top five rate payers, as measured by Bankrate.com, an interest-rate information service, people familiar with the matter say.

How does Ally Bank's CD rates currently rank at Bankrate.com? It's #6 for the 1-year CD, #8 for the 5-year CD (#5 to #7 have the same rate) and #9 for savings accounts (#2 to #8 have the same rate).

Issues to Consider

The main area where depositors can be affected by these rate caps is the reward checking account. The bank is free to lower rates, and as we've seen, the rate cuts can be harsh. So it does make sense to consider the health of the banks when you decide on new reward checking accounts. Our Bank Health Ratings page can be a useful resource. You can also use that page to review a list of banks with the worst Texas Ratios by asset size and by state. Another thing to consider is that credit unions are not subject to these rate caps. So that gives credit unions an advantage.