bank rates

FDIC May Limit Interest Rates

An interesting article from Bloomberg may only fuel the continuing sharp decline in money market and CD rates.

The Federal Deposit Insurance Corp., which is selling failed U.S. banks at the fastest pace in 17 years, today proposed limits on interest rates paid by lenders with less than adequate capital to aid banks’ liquidity.

The FDIC recommended banks be limited in tapping higher- cost sources of funds, such as brokered deposits, and be barred from paying rates that exceed a national average plus 75 basis points. The agency also said premiums paid to insure deposits should be based on risks faced by the banks that fail to meet regulatory requirements.

What do you think, is the FDIC just playing it safe? or is this just another step towards nationalization?

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Comments (18)
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18 Existing Comments
  1. Goner said:
    on February 3rd at 05:27 am

    Many banks will lose so many customers that theu will fail due to the interest rate limit

  2. SI Reasoning said:
    on February 3rd at 06:27 am

    I don’t like it, but understand it. I am currently gambling with banks that are just holding on by putting my savings to the bank with the best interest rates. I can do this because the money is backed by the FDIC. However, with so many bank failures I can see why they would want to encourage people to put their money in the safest banks by limiting the interest rates on savings and CD’s on the worst ones. This will have the affect of putting the final nail in most of these banks, but the FDIC would not be on the hook for as much. It would also have the affect of moving money over to more secure banks which might give them enough reserves to start lending again.

    It is bad for savers like me though in the short run. I think when all is said and done, expect the big banks that fail to eventually be broken up into smaller pieces which should counter the need for government takeovers of banks that are “too big to fail.”

  3. dudeguy said:
    on February 3rd at 07:00 am

    It’s ok to have a comment.

  4. BloggingBanks said:
    on February 3rd at 09:35 am

    What’s next? Nationalization? Socialism?

    “It is one step closer to nationalization,” said Scott Talbott, senior vice president of government affairs at the group.

  5. Dan@BankVibe.com said:
    on February 3rd at 07:13 pm

    Here is the way I look at it…

    On one hand, you can, we’ll call it “semi-safely,” stash money in domestic banks via deposits or MMA’s with assurance that this money is safe guarded by the federal government in exchange for low (now really low) interest rates, which are in all reality probably just barley squeaking by inflation rates.

    Or (another potential option)…

    We can invest in banks overseas (think – India, Mexico, EU rather than South Africa, Argentina, Brazil) with returns around 6-12% (not federally insured).

    I know even the thought of investing internationally will scare some but think about the banks you are investing in domestically…my guess is that A) your bank is probably a penny stock at this point, and B) if you watched the I.O.U.S.A. movie in Wu’s last post you’ll see America looks a lot like a dot.com company of the mid 90’s – a lot of money and hype within the country but no revenue stream (ie. exports or any other means of re-paying debt)…and if you believe that, then how confident are you with an institution such as the FDIC??

  6. Craig said:
    on February 4th at 04:45 am

    I think this is an incredibly bad idea. Nixon -> Carter proved price controls don’t work. I can see Dan’s point, causing even more investment & savings dollars to leave the US, as well as flock toward inflationary hedges like gold and precious metals.

    We are already hemorrhaging $ with the huge oil imports. Yet, for some reason, we still don’t see the obvious benefit of increased domestic drilling.

    If massive assets leave US banks to go overseas, the banks will have lower lending capital causing US credit to dry up even further. I would suggest going to the archives and brush up on how available bank lending power is calculated using multiples of deposits (assets) and then carry that thought through a period when deposit amounts are dropping. (oops looks like we could actually drive the US ecomonomy into an even deeper recession)

  7. SI Reasoning said:
    on February 4th at 02:43 pm

    I am not sure why we can trust international banks any more than domestic banks? At least domestic banks are FDIC insured. International Banks are hit by the same global recession/depression that started here and if I am not mistaken, they also took part in a lot of the same practices that the banks did here. I would guess that most banks around the world are insolvent on paper at this time.

  8. MoneyMarketMonitor said:
    on February 4th at 08:46 pm

    Hi,

    Thanks for catching this article! Interesting indeed. What does makes sense is for the FDIC premiums to better reflect the banks financial condition.

    On another note… during Q4 2008 FDIC also started charging business checking account clients service fees based on their average deposits. (If you have a business checking account you might have noticed that there is a small little service charge every month… that’s what it’s for).

  9. Pete said:
    on February 6th at 05:49 am

    Hmmm – a government institution attempts to act “conservatively” and responsibly to limit potential $$$ losses and some of the peanut gallery calls this an attempt at “nationalization” or worse yet “socialization”. That just cracks me up. How about letting the banks offer any rates they want but only banks that meet “minimum standards” will have their deposits insured by the FDIC.

  10. Neural forex said:
    on February 6th at 11:21 am

    Bad idea. When government institution regulates something it causes negative effect in most cases.

  11. Lynn said:
    on February 6th at 09:31 pm

    Paying low CD rates will hurt senior citizens the most.

  12. Craig said:
    on February 6th at 11:02 pm

    I think it is short sighted; not well thought out. This like many of these knee jerk reactions sounds good (and conservative and responsible), but may not have the intended outcome. If banks are forced into FDIC conservatorship because they cannot attract deposits, the US tax payer gets stuck with the bill. If the banks have unusual situations (like the collapse of the housing market), they cannot do the things necessary to remedy the situation.

  13. SI Reasoning said:
    on February 7th at 04:35 am

    Banks ARE failing and taxpayers are on the hook for those losses. It is better to move money from banks that are failing and instead shore up stronger banks. If money is being moved into failing banks that fail while stronger banks become weakened and threatened, then taxpayers are hosed and the whole FDIC structure becomes threatened.

    From the article:
    “The FDIC is proposing to use a national interest rate on deposits, abandoning Treasury yields as the benchmark. Bair said the rule would apply to a “small minority of banks,” about 2 percent, that fail to meet the “well capitalized” requirement. ”

    If this is an accurate account, we are talking about a 2% potential failure rate by banks and this proposal will limit the amount of these loses. Like I said before, the current market is rough on people with savings (like my family), but massive bank failures and taxpayer bailouts are worse. They need to do what they can to limit losses and I am willing to live with this proposal .

  14. SI Reasoning said:
    on February 7th at 08:00 am

    I just read an article dated Jan 27,2009 that said just the opposite:

    “The Federal Deposit Insurance Corp (FDIC), the agency that guarantees bank deposits, is expected to ease rules restricting relatively weak banks and thrifts from paying higher rates to attract deposits. Under current rules, institutions rated below “well-capitalized” are restricted from paying rates much higher than U.S. Treasury bond yields. But that benchmark is abnormally low right now as investors flock to the relative safety of government securities, so the FDIC is weighing whether to shift the benchmark to a simple average of deposit rates paid by all insured institutions.

    As more banks slip below “well-capitalized,” the change could have a widespread effect, pushing savings rates far above treasury yields as banks scramble to attract depositors. Many investors are sitting on large sums of cash in existing high yield accounts, CD’s, money market funds or bonds – so this move could be a boon for them compared to the dismal returns currently on offer in stock markets.”

    So if they did the above in late January, maybe they are reconsidering that approach.

  15. Paul said:
    on February 8th at 12:01 pm

    At first glance, this seems like a policy that would hasten the failure rate among banks. At any rate, I will continue to simply use the Veribanc rating service to guide me in purchasing any CD.

  16. Fred said:
    on February 12th at 06:34 am

    Micro investors will be hurt bad. Folks that count on their interest earning to supplement social security for example, they will be hit hard. One could go to other than dollar markets abroad for higher rates but then you have to account for currency fluctuations that could eat away at your money fast, plus, foreign bank regulations that could tax your interest income, etc. There really is not an easy solution on where one is to put a life’s savings safely and to make a reasonable interest income to augment a retirement pay check from an employer and or social security.

    Additionally, one needs to also be concerned about the value of dollar to other currencies… if the dollar tanks, which I think there is no other way for it go, it will add to our worries even more, how can one hedge against that? Buy gold maybe? But then Gold does not provide any supplemental income to folks that need it, and that commodity in and of itself is highly speculative as well. What a perfect strom we are facing after 8 years of Bush! What a mess.

  17. John said:
    on February 22nd at 06:07 am

    Who is John Gult ?

  18. Scott R said:
    on February 22nd at 12:01 pm

    Do free markets always work? NO. Sad but true. Look at the deregulation of the oil industry. Human greed must be watched. Banks are no different. The FDIC must watch and regulate. But…..the FDIC must also be watched and regulated.