Pending Rule Will Make Bank Rates A Possible Sign of Health

Banks offering high interest rates on savings accounts, CDs, and other deposits are attractive to savvy bank shoppers anyway, but a pending FDIC rule could make them even more appealing. Effective January 1, 2010, the FDIC will put a cap on bank rates offered by institutions categorized as "less than well capitalized."

The new rule addresses bank rates for several types of accounts, including savings, checking, and money market accounts, plus CDs of various lengths. The rule also distinguishes between regular and "jumbo" deposits, which are accounts of $100,000 or greater.

Essentially, the rule takes the national average of each account type, and dictates that less-than-well-capitalized banks cannot offer more than 75 basis points (0.75%) above that national average.

The logic behind the rule is clear -- and also debatable. Banks with less than perfect financial health will be barred from offering interest rates that are so generous that they might further jeopardize that health. On the other hand, those banks will be forced to be less competitive in the marketplace, thus hampering their ability to attract and retain depositors. This kind of restriction could actually hasten the downward slide of banks with weakened financial conditions.

Whether or not banks suffer from this unintended consequence remains to be seen. For depositors though, the rule would seem to give yet another reason to shop around for bank rates. Not only will the highest rates be most rewarding financially, but they should also be a sign that the bank offering them is not considered by the FDIC to have shaky capitalization.

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