A day after releasing a discouraging report about the banking industry, the Federal Deposit Insurance Corp. said struggling banks will no longer be able to attract deposits by offering interest rates far above prevailing market conditions.
The regulator's board of directors voted Friday to restrict "not well-capitalized" banks from offering interest rates that "significantly exceed" market rates.
Struggling banks often have a hard time attracting the deposits they need in order to maintain appropriate capital levels and conduct regular lending operations. Offering exceedingly high rates on certificates of deposit and other consumer instruments is one way to make up the shortfall. However, it can also put the bank on the hook for large debt obligations down the road.
Before it collapsed last year, Washington Mutual Inc. was offering five percent on certificates of deposit when the going rate was three to four percent, Consumerist.com reported.
Current law already prohibits struggling banks from offering excessive interest rates, but critics have said that the FDIC did not properly define the meaning of "normal market rates." The problem has grown over the years due in part competition on the Internet, said Sheila Blair, the chairwoman of the FDIC.
The new rule requires the FDIC to post a "national rate" on its website, which bankers would have to refer to in deciding whether their offered rate qualifies as reasonable. If a bank feels that local conditions require an adjustment, it can appeal to its regulators for an exemption.
Yesterday, the FDIC published a report showing that banks continued to fail at record levels. As BailoutSleuth reported, much of the problem continues to be fallout from the housing market, which accounted in the last quarter for 84 percent of the recent increase in non-confirming loans.
The regulator's board of directors voted Friday to restrict "not well-capitalized" banks from offering interest rates that "significantly exceed" market rates.
Struggling banks often have a hard time attracting the deposits they need in order to maintain appropriate capital levels and conduct regular lending operations. Offering exceedingly high rates on certificates of deposit and other consumer instruments is one way to make up the shortfall. However, it can also put the bank on the hook for large debt obligations down the road.
Before it collapsed last year, Washington Mutual Inc. was offering five percent on certificates of deposit when the going rate was three to four percent, Consumerist.com reported.
Current law already prohibits struggling banks from offering excessive interest rates, but critics have said that the FDIC did not properly define the meaning of "normal market rates." The problem has grown over the years due in part competition on the Internet, said Sheila Blair, the chairwoman of the FDIC.
The new rule requires the FDIC to post a "national rate" on its website, which bankers would have to refer to in deciding whether their offered rate qualifies as reasonable. If a bank feels that local conditions require an adjustment, it can appeal to its regulators for an exemption.
Yesterday, the FDIC published a report showing that banks continued to fail at record levels. As BailoutSleuth reported, much of the problem continues to be fallout from the housing market, which accounted in the last quarter for 84 percent of the recent increase in non-confirming loans.
published May 29, 2009, 0 Comments
Leave a comment