Bank Rates Could Take a Hit from Latest FDIC Proposal

Could Bank Rates Fall as an Unintended Consequence of the FDIC's Funding Proposal?

The FDIC needs to replenish its insurance fund--the fund that's used to repay depositors at failed banks. To do this, it has proposed having member banks prepay their risk assessments (basically, their insurance premiums) for the next three years. Could this have unintended consequences for bank rates and even for the viability of some banks?

Impact on Bank Rates

Prepaying their risk assessments for three years will cut into the short-term profitability of banks. Where will they make up for this? With congressional and public heat on bank fees, the likely source of these funds is savings account interest rates, CD rates, and everything in between. Shaving a little off bank rates is less visible than raising fees and thus less controversial.

If you thought deposit rates such as savings account rates and CD rates couldn't possibly get any lower, you may be in for an unwelcome surprise.

Impact on Bank Health

There's another possible unintended consequence of the FDIC's proposal: it could negatively impact the health of some banks. While banks would make up for the advance payments by not having to make these payments in future years, solvency is often a matter of cash flow and timing. Front-loading these payments could push some already-shaky banks over the edge.

It could be argued that smoking out banks that may have trouble surviving anyway could be a good thing, but not if it creates more demands on the FDIC fund in the process. That could mean additional assessments on the banks, leading to a vicious cycle that causes yet more hardships.

In its press release on the proposal, the FDIC congratulated itself for not simply tapping US taxpayers for the needed funding. Unfortunately, that doesn't mean that the proposal won't cost some Americans--including depositors who had little to do with causing the banks' problems in the first place.

Source:

Press Release: Banks Tapped to Bolster FDIC Resources • Sep 29, 2009 • http://www.fdic.gov • http://www.fdic.gov/news/news/press/2009/pr09178.html • Federal Deposit Insurance Corporation