On May 29, 2009, the FDIC adopted a final rule amending the interest rate restrictions applicable to institutions that are less than well capitalized.  The new regulation, which will take effect on January 1, 2010, will effectively tie interest rate caps to an average of interest rates charged nationally, significantly diminishing the importance of calculating prevailing interest rates within local deposit market areas.  Less than well-capitalized institutions will generally be subject to national rate caps as published by the FDIC.

Existing Rules

Section 29 of the Federal Deposit Insurance Act places statutory limits on the ability of any insured depository institution that is not well capitalized to accept brokered deposits.  As we have noted earlier, these brokered deposit rules also limit the interest rates that may be paid by insured depository institutions that are not well capitalized.  In order to be considered well capitalized, an insured depository institution must exceed certain uniform regulatory capital measures, as well as not be subject to any written agreement or order issued by its primary federal regulator that requires the institution to meet and maintain a specific capital level for any capital measure.

Under the current rules, any institution that is not well capitalized (including those subject to a regulatory capital order) may not pay interest in excess of 75 basis points over the average interest paid for comparable deposits in the institution’s “normal market area,” although institutions operating under a brokered deposit waiver may not pay interest rates in excess of 75 basis points over a “national rate” for deposits that are accepted outside the institution’s “normal market area.”

The current rule has proved increasingly problematic in recent years; with the Internet blurring local deposit market boundaries, regulators and institutions have had difficulty determining what constitutes an institution’s “normal market area.” In addition, the “national rate” applicable to institutions with a brokered deposit waiver has proved to be largely obsolete in recent years, as it ties permissible interest rates paid on deposits solicited nationally to the comparable maturity Treasury yield, resulting in an excessively low “national rate.”

The New Rule

The new rule moves to solve these two problems by redefining the “national rate” as “a simple average of rates paid by all insured depository institutions and branches for which data are available” and creating a presumption that this national rate is the prevailing rate in any market.  Effective immediately, the FDIC will regularly (weekly) publish national rates and caps, and permit institutions that are less than well capitalized to avail themselves of these rates as a safe harbor for complying with the statutory interest rate restrictions.

As of June 1, 2009, the highest rate that could be paid by a less than well-capitalized institution for a savings account would be 97 basis points, for a money-market account would be 1.21%, for a six-month CD would be 1.70%, for a one-year CD would be 2.00%, and for a 5-year CD would be 2.94%.  The FDIC Weekly National Rates and Rate Caps provides the rates and caps for various deposit maturities and sizes.

Should an institution believe that the prevailing rate in its state, county or metropolitan statistical area is higher than the national rate, the final regulations permit the institution to seek to rebut the presumption that the national rate is the prevailing market rate for the institution.  Evidence of a higher effective yield in a particular market may include (but will not be limited to) the following:

  • evidence as to the rates paid by other institutions in the same state, county or metropolitan statistical area (MSA);
  • evidence as to the rates paid by credit unions in the same market area if the FDIC determines that the insured depository institution competes directly with those credit unions;
  • evidence as to the different rates paid on different deposit products in the same market area, i.e., the FDIC could distinguish between the prevailing rates for MMDA and NOW accounts in a single market area.

However, while the FDIC will publish separate rates for deposits of different amounts and maturities, it does not intend to provide a less than well capitalized institution with complete flexibility in determining the prevailing rates on deposit products. For instance, the FDIC will not consider alleged distinctions between the Money Market Deposit Accounts (MMDAs) offered by one institution with those MMDAs offered by another institution in the same market.

Under the final rule, the FDIC retains the sole discretion whether to accept an institution’s evidence that the national rate should not be treated as the applicable rate for the depository institution.

The New Rates

In light of the new rules, institutions that are not well capitalized should compare their current rates to the FDIC’s posted national rate and caps.  Based on a brief review of other websites that have historically posted seemingly comparable national average rates for deposits, there is significant variation in the reported averages.  Accordingly, historic comparisons to other national averages (and references to those sources) may no longer be satisfactory to the FDIC.

The new regulations don’t become effective until January 1, 2010.  However, the FDIC has stated that institutions may avail themselves of these rates as a safe harbor for complying with the statutory interest rate restrictions immediately.   Accordingly, if the national rate caps would permit paying higher interest rates, banks may begin paying those rates immediately, while if they require lower rates, banks can continue to rely on the existing rules until January 1, 2010.

Should an institution that is not well capitalized find that it would face significant difficulties in complying with the new national rate caps, it should be in contact with the FDIC to determine whether it is feasible for the institution to provide sufficient evidence to the FDIC to cause the FDIC to determine that the national rate is not appropriate for that institution.