FDIC Rate Caps: Why They Matter to You
Last month the FDIC Board of Directors approved a final rule regarding interest rate restrictions that apply to banks categorized as less than well capitalized institutions. Although the new law applies to less than 300 of the nation’s 8,000 banks, it has gathered a lot of media attention. In reality though, not much has changed. The FDIC has always had the ability to restrict banks categorized as weak from aggressive deposit or lending practices. This new change is simply a revision in the benchmark used to compare the bank rates. The FDIC will now publish weekly national rate averages. Beginning in January 2010 a weak bank will have a deposit rate cap of the published national rate average plus 75 points. This could mean some weak banks may have to lower their rates on CDs, money market accounts, savings accounts, or checking accounts. Major online banks like ING Direct, EverBank, Ally Bank, and First Internet Bank will be completely unaffected by the rate cap and continue to set their rates as high as they want.
National Rate Averages as Reported by FDIC
Savings Accounts .22%
Interest Checking .14%
Money Market Accounts .46%
3 month CD .67%
6 month CD .95%
12 month CD 1.25%
24 month CD 1.54%
36 month CD 1.78%
48 month CD 2.03%
60 month CD 2.19%
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Should Savers Worry?
A rate cap might seem like very bad development for savers, but even with a rate cap a bank could offer a one-year CD at 2.00% or a five-year CD at 2.94% based on the latest averages released from the FDIC. Those rates should be high enough to be very competitive in most local markets. And again we are only talking about less than 5% of the nation’s banks that qualify for the rate restrictions. 95% of the banks will it is business as usual. When January 2010 rolls around, it is possible savers may not even notice a difference in the market rates they see for deposits.
The Future of Bank Rates
Bank rates are expected to increase. The unprecedented level of government spending by the United States is expected to keep pressuring long term interest rates higher over the next few years. This has already started to happen in the last few weeks and economists are forecasting that the trend will continue. Eventually, the Fed is very likely to assess the risks of inflation in the economy as greater than the risks of negative economic growth and begin to increase short-term rates. When this happens, we will have two giant earth-moving objects, inflation and the Federal Reserve, set to tear down the paper castle that is low interest rates. No regulatory action by the FDIC is going to stop the momentum of higher interest rates once it gains traction. The FDIC can identify a weak bank and moderate their deposit rates to a reasonable level. They may even save taxpayers some money along the way. However, the FDIC cannot keep savers from finding good rates for their deposits from the thousands of healthy banks in the country. Don’t worry about the FDIC rate cap.