UPDATE: 07-03-09 FDIC PUBLISHED THE WRONG RULE

The FDIC has published a correct version of their final rule concerning Interest Rate Restrictions on Insured Depository Institutions That Are Not Well Capitalized. According to the FDIC, they have withdrawn the previous rule because the inadvertently published a "draft" document instead of the final rule. The new rule published on June 11, 2009 can be found in the Federal Register (74 FR 27683: Technical Amendments to Interest Rate Restrictions on Insured Depository Institutions That Are Not Well Capitalized). Don't you hate it when this happens ...  

Original Blog Entry ...

Ostensibly promulgated to protect the consumer from being lured into depositing money in a less than well-capitalized bank to obtain a higher interest rate, the FDIC is now attempting to regulate the offering rates at depository institutions.

One might ask if this rule was promulgated to limit the amount of insurance money the FDIC might pay-out to consumers of a failed financial institution since all accounts at or under $250,000 are insured (at least until December 31, 2013) regardless of their interest rates? Or alternatively, one might ask if the rule was promulgated to prohibit  weaker financial institutions from attracting necessary capital to restore them to competitive health by offering a higher interest rate to consumers and others.

To my way of thinking, on its face, the rule seems anti-competitive and overly restrictive – the hallmarks of an increasing socialist Obama administration.

The new FDIC rule …

Financial Institution Letters

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Interest Rate Restrictions on Institutions That are Less Than Well Capitalized Final Rule (FIL-25-2009
May 29, 2009)

Summary:
The FDIC has issued the attached final rule making certain revisions to the interest rate restrictions under Part 337.6 of the FDIC Rules and Regulations. Under the final rule, the "national rate" is a simple average of rates paid by U.S. depository institutions as calculated by the FDIC. When evaluating the Part 337.6 compliance of an institution that is less than Well Capitalized, the FDIC will deem the national rate to be the prevailing rate in all market areas, unless it agrees with evidence provided by the institution that it is operating in an area where prevailing deposit interest rates are higher. The final rule is effective January 1, 2010, but the FDIC does not object to the immediate use of the newly defined national rate by an insured depository institution.

Highlights:

• Because of the current low yields on U.S. Treasury securities, the national rates computed under the FDIC's Part 337.6 fall well short of the national average rates paid on deposits by depository institutions.
• The final rule redefines the national rate for deposits of similar size and maturity to be "a simple average of rates paid by all insured depository institutions and branches for which data are available."
• The FDIC will calculate and publish a weekly schedule of national rates and national interest-rate caps by maturity.
• Recognizing that competition for deposit pricing has become increasingly national in scope, the rule establishes a presumption that the prevailing rate in all market areas is the FDIC-defined national rate.
• Institutions that are less than Well Capitalized, and their supervisors, may rely upon the national rates published by the FDIC for purposes of determining compliance with Part 337.6 in lieu of any further analysis.
• An institution not choosing to use the national rate can define its market area and support its position to the FDIC that prevailing rates in that area exceed the national average.

Under Part 337.6, a less than well-capitalized insured depository institution may not pay a rate of interest that significantly exceeds the prevailing rate in the institution's market area or the prevailing rate in the market area from which the deposit is accepted. For out-of-area deposits, the national rate, currently defined as 120 percent of the current yield on similar maturity U.S. Treasury obligations, determines conformance with the regulation.

The final rule also allows any depository institution to use the national rate as a proxy for the prevailing rate in an institution's local market area. This approach recognizes that with the increasing prevalence of Internet deposits and Internet advertising of deposit rates, price competition for deposits is increasingly national in scope. This approach also recognizes and avoids the considerable practical difficulties in ascertaining the origin of the deposit and calculating the prevailing rates paid within that area. If the institution does not want to use the national rate as a safe harbor, the burden will be on the depository institution to define its market area and support its belief to the FDIC that the prevailing rates in that area exceed the national average. This process will be communicated in a Financial Institution Letter before the rule's January 1, 2010, implementation date.

In implementing the rule, the FDIC will monitor and publish a schedule of national rates by maturity and the rate caps for such deposits. Separate national rates and rate caps will be posted for NOW accounts, Money Market Deposit Accounts (MMDAs) and savings accounts (other than MMDAs). The rate cap will be the national rate plus 75 basis points. The national rates and national rate caps will be posted weekly and can be viewed at [the FDIC rate site].

Attempting to control risk or competition?

I find it abhorrent that the regulatory agencies are attempting to control interest rates paid to investors at a time when most savings investments are producing a negative yield when factored for inflation – and simultaneously allowing financial institutions to charge almost usurious rates (compared to the days when usury laws meant something) on credit card debt and other loan products. It almost seems that the entire system is being managed to maximize the profits (and bonuses) of the financial industry – partially to assist in the recovery of money lost due to their criminal lack of fiduciary responsibilities in the derivatives marketplace. 

In any event, this type of regulation serves to illustrate the toxic effects of the over-arching regulation of the financial industry on one hand and the total lack of responsibility for enforcing existing laws, rules and regulations which would have stopped the mortgage meltdown in its tracks. Not to mention a lobbyist-dominated legislative process which exempted those who were offering derivative products from being prosecuted under state gaming laws and which continues to confers an advantage to the financial industry over the protections necessary to assure the consumer of a fair and honest deal.

And, I need not point out that this is not a rule that has been created by Congress, but is one of the myriad administrative rules issued at Agency level with the backing of the Administration – and one way in which the Executive branch can usurp law-making authority from the Legislative branch in contravention of the Constitution.

My viewpoint …

This rule is tantamount to imposing price controls on the financial industry to the detriment of the consumer. Not that the stronger institutions will mind as they gain market share from the weaker institutions who are forced to merge or be liquidated. Which would have happened anyway – but whose demise may be hastened if they are unable to attract capital by offering above competitive interest rates.

But the reason I am not comfortable with this rule is that its unintended consequences deeply affect consumers who would have benefited from the marginally higher rates – and who may need the income to supplement their already decimated investments. (e.g. senior citizens on a fixed income who trusted financial institutions to exercise their fiduciary responsibilities to act in a prudent manner)

The collapse of the financial industry and the failure of the Administration and Congress to punish those who played the system and walked away with multiple millions in bonuses based on cooked books and erroneous pricing/valuation assumptions is criminal in and of itself. And those legislators who received special consideration from the financial industry or who were complicit with its failure should be thrown off committees and out of Congress – and prohibited from any lobbying activities involving the financial industry. Specifically, House Financial Services Chairman Barney Frank (D-MA) and Senate Banking Committee Chairman Christopher Dodd (D-CT) are prime candidates.

The fact that regulatory agencies have allowed institutions to escape punishment (without admitting guilt, but agreeing to forgo similar practices in the future) in return for a media-worthy “record fine” is also unconscionable. Especially when the fine is actually so small in relation to their profits as to be considered a cost of doing business.

It is time that “we the people” take our government back from the sleezeball politicians who continue to put their personal, professional and political self-interests above those of the citizen/consumers they purport to represent.

-- steve

    Quote of the Day:   "The subjectivity in our current rule is allowing some weak banks to drive up costs for the rest of the industry." -- FDIC Chairman Sheila Bair.

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OneCitizenSpeaking: Saying out loud what you may be thinking …

Reference Links:

FDIC: FIL-25-2009: Final Rule