About Ken Tumin

Ken Tumin founded the Bank Deals Blog in 2005 and has been passionately covering the best deposit deals ever since. He is frequently referenced by The New York Times, The Wall Street Journal, and other publications as a top expert, but he is first and foremost a fellow deal seeker and member of the wonderful community of savers that frequents DepositAccounts.

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Regulations That Suppress Deposit Rates


I've mentioned several times about how one regulation has suppressed deposit rates. That involves the FDIC deposit rate caps for banks that are categorized as less than well capitalized. As I described in this post, there have been many examples in which these rate caps have forced large cuts to reward checking rates.

As I was reviewing the FDIC's press releases yesterday waiting for bank closures (there were none), I came across this June 30th press release titled "Banking Agencies Issue Host State Loan-to-Deposit Ratios". At first it didn't seem that interesting, but as I read through it, I was disturbed to see how this regulation could provide another headwind to higher deposit rates.

The main intent of the press release was to announce the new loan-to-deposit ratios. These ratios will be used to determine compliance with an old regulation, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. The press release provided a summary of section 109 of this regulation. Here's an excerpt:

In general, section 109 prohibits a bank from establishing or acquiring a branch or branches outside of its home state primarily for the purpose of deposit production. Section 109 also prohibits branches of banks controlled by out-of-state bank holding companies from operating primarily for the purpose of deposit production.

Section 109 provides a process to test compliance with the statutory requirements. The first step in the process involves a loan-to-deposit ratio screen that compares a bank's statewide loan-to-deposit ratio to the host state loan-to-deposit ratio for banks in a particular state.

A second step is conducted if a bank's statewide loan-to-deposit ratio is less than one-half of the published ratio for that state or if data are not available at the bank to conduct the first step. The second step requires the appropriate banking agency to determine whether the bank is reasonably helping to meet the credit needs of the communities served by the bank's interstate branches.

A bank that fails both steps is in violation of section 109 and is subject to sanctions by the appropriate banking agency.

So the regulation seems to be intended to ensure banks meet the credit needs of communities. One of the consequences of this regulation may be lower deposit rates as banks are forced to raise their loan-to-deposit ratios. Lower deposit rates can shrink the banks' deposits which will raise the loan-to-deposit ratios.

What I would like to know is where are the regulations that ensure banks meet the deposit needs of their communities? The needs of depositors to receive a reasonable interest rate seem to be a very low priority for government officials.

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  |     |   Comment #1
Typical backward thinking of regulators.  Goal is to get more money into circulation by forcing banks to have higher loan-to-savings ratios.  So the obvious result is that banks will make more loans, not that banks will reduce savings.  (Where’s that sarcasm font?)  Here’s a great idea:  Don’t worry, those sub-par loans you make will be covered by the full faith and credit  of the US govt, at least for you “important” institutions that are too big to fail.
  |     |   Comment #2
What I don't understand is how are the mega banks allowed to operate under this statute. Didn't it say that Section 109 prohibits a bank from establishing or acquiring branch or branches outside its home state primarily for the purpose of deposit production. Tell me how BoA, Wells, Citibank and Chase are able to comply with these rules. Are they exempt from this rule while the smaller community banks are getting ****ed.
  |     |   Comment #3
>>primarily for the purpose of deposit production

It just doesn't need to be the primary reason. Getting more market share, it was a good deal, and buying failing institutions can be reasons. What is the problem with using deposits from one region to fund loans in another region anyway? Supply and demand!

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