As I reported on Friday, Tennessee Commerce Bank (TCB) was closed by regulators, and the FDIC arranged for Republic Bank to assume all deposits. I just found out this morning that Republic Bank has decided on Tuesday to slash all TCB deposit rates to 0.05%. Also, this change will retroactively take effect on last Saturday (1/28/2012). This is what I was told when I called Republic Bank this morning at 877-684-2265. TCB depositors are free to close their CDs without early withdrawal penalties. With a new rate of only 0.05%, TCB depositors have no reason to wait before they move their money.
One thing I found dishonest is one of Republic Bank Q&As that was posted on its website. This Q&A suggested that CD rates would remain competitive. Below is an excerpt:
Q Will there be changes to my CD or IRA?
A You will continue to receive your interest payments as you have in the past. Your rates on your Certificates of Deposit may change to more competitive rates. As a deposit customer you will receive a letter from Republic Bank via U.S. Mail within 7 days of the transaction with an enclosure titled "Notice of Rate Changes to your Interest Bearing Deposits". Please read the document carefully.
Even in today's awful interest rate environment, a 0.05% is not competitive for any deposit account. Some average rates listed at the FDIC's Weekly National Rates and Rate Caps include: 0.32% for a 1-year CD, 0.72% for a 3-year CD and a 1.19% for a 5-year CD.
Unfortunately, the bank that acquires the deposits of a failed bank is allowed by law to lower CD rates, and they're allowed to change rates effective the day after the bank's closure. On the plus side, the acquiring bank is required to allow CD holders to make a penalty free early withdrawal.
Based on this rate cut, it certainly appears Republic Bank has no desire to keep TCB customers. I wonder if it might be due to TCB having many customers from outside of Tennessee. In the past years TCB had many savings account and CD specials, and accounts were available nationwide. A quote by Republic's chief executive in this The Tennessean article suggested that his main concern was the Nashville market:
Republic’s chief executive, Steve Trager, said virtually all Tennessee Commerce deposits will be protected and automatically transferred to Republic accounts.
“Our interest is gaining a foothold in the Nashville market,” Trager said.
In my opinion, if a bank wants to keep customers of a failed bank, it should keep the CD rates the same until maturity. As I reported on Friday, US Bank did this with the other Tennessee bank that failed on Friday, BankEast. On its website, US Bank stated that BankEast CD rates will remain the same.
Sometimes banks will say that they're changing a rate to what's competitive in the current environment. I don't consider that as fair even if the rate may be considered reasonable by today's standards. If they're going to lower the rates, it should be no lower than what was competitive when the CD was first issued. For example, if a problem bank sold 5-year CDs in 2008 with a 6.00% APY and that bank fails in 2012, how should that 5-year CD rate be changed? A bank that acquires that failed bank may think a 1.19% APY is fair since that's the current national average rate based on the FDIC numbers. That's not fair in my opinion. It should be no lower than the national average rate that was in effect when the CD was first issued in 2008. My guess for that average would be around 3.00%.
This issue is the main concern for depositors when banks fail. It hasn't been losing money from uninsured deposits. It has been losing CD rates. Since rates have fallen so much in the last few years, that can be a significant loss.
Thanks to readers who commented and emailed me about this rate change.