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FDIC To Limit CD Rates At Failing Banks

The federal government has found a new way to punish savers — limit the interest rates troubled banks can pay for deposits.

It’s no secret that failing banks often offer the best CD rates in a desperate effort to raise money.

The federal government has found a new way to punish savers -- limit the interest rates troubled banks can pay for deposits.

But that leaves the Federal Deposit Insurance Corp. holding the bag for all of those new, expensive deposits when it still has to seize one of those insolvent banks.

The FDIC used to suck it up and honor all of the high-yield CDs issued by failed banks as an annoying but necessary cost of maintaining consumer confidence in the banking system.

That changed this year as the FDIC depleted its insurance fund by seizing more than 120 banks. Federal regulators stopped automatically honoring the above-market average CD rates from failed banks.

Although savers would have their principal returned, and be paid any interest they’d earned prior to the failure, the future return on those CDs would be lowered to something closer to the national average.

Savers were understandably miffed because the Federal Reserve has been pushing CD rates to record lows, making it impossible to earn a reasonable return on their investments.

So the FDIC has decided to stop troubled banks from ever issuing top-paying certificates of deposit.

Beginning Jan. 1, 2010, banks that are not deemed to be “well capitalized” by the FDIC will not be allowed to sell CDs for more than 0.75 percentage points above the national average.

This week, for example, the FDIC national average for a 12-month CD is 0.96%, which would cap the rate for troubled banks at 1.71%.

That’s about three-tenths-of-a-point less than the 2.00% you can earn with the top-paying CDs.

The FDIC is also applying the cap to savings, money market and interest-bearing checking accounts.

Although only 552 of the 8,200 FDIC-insured banks are less than well-capitalized, this will almost certainly hurt savers yet again.

The best deals will be less lucrative than they would have been without this new rule — guaranteed.

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  1. Craig C said:
    on December 11th at 09:20 am

    I think this is going to cost the FDIC more money not less. If troubled banks can’t raise capital to meet the Fed requirements it is going to force them to fail rather than allow them the opportunity to make a last effort.

    I had a CD at one of the failed banks (the one with the free TV option). Unless the FDIC took things like this into consideration, we may be seeing more offers like this instead. Once you put these rules in place the banks will probably find a loophole. Maybe I can get a new TV for the bedroom next… :)