FDIC May Limit Interest Rates

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.”

What’s next? Nationalization? Socialism?

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

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)

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).

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

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.

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.

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.

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.