bank rates

How CD Rate Caps Punish Savers

The FDIC limits CD rates from failing banks.I didn’t need another reminder of how awful CD rates are.

But I got one anyway.

On Dec. 12, financially strapped banks were blocked from offering 2% or more on certificates of deposit of 60 months or less.

These banks were prevented from offering a higher rate because of a rate caps rule the FDIC adopted in 2009.

That rule prevents weak banks from offering CD rates more than three-quarters of a percentage point higher than the national average rate for deposits of comparable size and maturity.

On Dec. 12, the highest effective rate permitted banks categorized as “less than well-capitalized” was 1.99% for a 60-month jumbo CD. The highest rate for non-jumbo 60-month CDs was 1.98%.

The FDIC can make an exception if a bank is able to show that rates in local markets justify something higher than 0.75% over the national rates.

The FDIC revises the national rates and rate caps weekly, based on the simple average of rates paid by all U.S. banks for which the agency has data.

The rate caps prevent weak banks from using their FDIC-insured status to unfairly compete for deposits with sounder institutions by offering significantly better rates.

They also protect the FDIC and its insurance fund from imprudent deposit-gathering by poorly capitalized banks.

The restrictions cover only a small minority of banks. (As of Sept. 30, the FDIC list of problem banks included 844 names among a total of 7,437 insured institutions. It does not release the names of banks on the list.)

Understand, I’m not looking to find troubled banks to deposit money in just now.

But the rate ceilings are indicative of where CD investors stand, and, for me, the breaking of the 2% yield barrier was particularly troubling.

Although I have no evidence the caps put downward pressure on CD rates offered by healthy banks, you have to ask yourself a question:

If weak-sister banks can’t pay 2% on 5-year CDs, how many stronger banks will be willing to do so?

The answer: very few.

(Although no bank included in this site’s nationally available CD rates tables offers 2% or more, U.S. Bank offers a 2.25% APY for 59 months and Quaint Oak Bank a 2.20% APY for a full 60 months.)

Pretty depressing.

Isn’t it about time Ben Bernanke declared “Mission Accomplished”?

The FDIC rate caps say so.

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