Shopping for Savings Account Rates Gets a New Wrinkle from the FDIC

Smart bank customers know they can get much better than average savings interest rates by actively shopping on Money-Rates.com. Effective January 1, 2010, high bank rates got a little bit harder to find, making shopping for the best savings rates all the more important.

What changed on January 1? A new regulation from the Federal Deposit Insurance Corporation (FDIC) forced some banks to lower the savings account rates they offer and imposed ongoing limits on those banks.

How the FDIC Regulation Affects Bank Rates

The FDIC approved this new regulation in May 2009, in the thick of the banking crisis. The directive imposes limits on how much institutions defined as "less-than-well-capitalized" can offer in interest rates. This applies to savings account rates as well as money market rates, CD rates, and other deposit rates.

These limits are designed to move with market conditions. Rates for these banks are capped at 75 basis points (0.75%) above what the FDIC finds to be the average rate for a given type of deposit vehicle. For example, at the end of 2009, savings account rates averaged 0.20%, according to the FDIC, so the highest savings account rate a less-than-well-capitalized bank could offer would be 0.75% more than that, or 0.95%. Money market rates averaged 0.34%, so the cap on money market account rates offered by such banks would be 1.09%.

This regulation could help make bank deposits more secure in two ways. First, by imposing some business discipline on banks with deficient capital structures, the regulation could rein in what those banks are spending on deposit interest. Second, by limiting the ability of those banks to offer high rates to attract depositors, the regulation could limit the amount of money at risk in banks with less-than-ideal capital structures.

Of course, the counterargument would be that, by limiting the ability of these banks to attract depositors, the FDIC is making it more difficult for them to improve their capital structures. This could potentially start a downward spiral in which a troubled bank loses business until it can no longer survive.

What This FDIC Rule Might Mean for You

It remains to be seen whether the impact on banks will be positive or negative, but here are some things the new regulation might mean for bank customers:

• If you are at a bank that is considered by the FDIC to be "less-than-well-capitalized," you may have seen your savings account rate drop as of the first of this year. This would have occurred if the savings account interest rate had been more than 0.75% above the national average. The drop in rates might be annoying, but you might appreciate the heads-up that your bank is not as well capitalized as it should be.
• When you see a very competitive rate--and assuming that it is from an FDIC-insured bank and for a straightforward savings account--you should now have the added reassurance that this also means the FDIC considers the bank to be well-capitalized.
• For the marketplace as a whole, this means that there will be fewer rates available above the cap. Still, Money-Rates.com will continue to cast a wide net in compiling the best savings account interest rates and rates for other deposit account types, so you should continue to find a range of competitive products available to you.

Source:

Weekly National Rates and Rate Caps • http://www.fdic.gov/regulations/resources/rates/index.html • Federal Deposit Insurance Corporation

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