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FDIC limits weak banks' interest rates
The FDIC emblem.
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TEXT OF STORY
KAI RYSSDAL: Staying with the financial sector for just a moment here, what would it take for you to knowingly put your money in a troubled bank -- even though it's insured? Maybe higher rates on your deposits? That's an old trick. And as of today the Federal Deposit Insurance Corporation says it is officially a no-no. Marketplace's Janet Babin reports from North Carolina Public Radio.
JANET BABIN: When a bank offers better than average rates on a CD or savings account, Christopher Whalen at Institutional Risk Analytics says it's usually a bad sign.
Christopher Whalen: They are offering higher deposit rates in the hope -- in the desperate hope -- that they can keep the doors open.
Those higher rates may help struggling banks brings in customers, but they can drive up costs for healthy institutions. The new rules from the FDIC will force troubled banks to look for new ways to drum up business. The agency will publish national interest rate averages. And it'll impose interest rate restrictions on banks that are short on capital. The agency says the new limits will only apply to a small percentage of banks.
Chris Whalen says the new rules protect the FDIC from having to pay out on those higher interest rates if the bank fails.
Whalen: You want to favor those institututions that are doing the right thing, and you want to limit the risk of the bad institutions because when they fail the FDIC has to pick up the cost.
The FDIC charges banks monthly fees. That's how it makes good on deposits when a bank goes under. But former bank examiner Mark Williams says ultimately, we pick up the tab for banks gone bad.
Mark Williams: Indirectly taxpayers do pay for bankruptcies and we saw that in the savings and loan crisis in the 1980s.
The new rule comes as the number of banks on the FDIC's problem list tops 300 -- the highest since 1994.
I'm Janet Babin for Marketplace.
The failure rate of banks these past several years has been simply mind-boggling. To say that this whole issue is a concern is to understate the case. The raft of bank failures across the financial system, both in the US, and internationally, has been alarming. When banks fail in large numbers, consumer confidence, lifestyles, financial, economic, and social wellbeing, and indeed the very health of the nations involved and the global economy, are all affected. Consequences can be heart rending and drastic. One of the things that can be done to improve this sad state of affairs is to re-examine the laws and protections in place to try to find a balance between maintaining a healthy level of individual decision making while maintaining a level of consumer confidence and protecting investors from unreasonable perils. In the Asian context, examining the issue of <a href="http://www.thailawforum.com/thai-deposit-insurance-law.html">deposit insurance Thailand </a> has begun to revamp some of its laws in the financial sector to try to find just such a balance. The emphasis has been on reasonable protections while controlling excess, a balance that of late the US seems unable to find.
Unfortunately, I missed the part of your story stating what the new limit would actually be. Within rational guidelines, the banks should be able to raise their interest rates as a way to attract new customers. If a bank is so close to failing that moving the interest rate up triggers a collapse, perhaps FDIC should have closed them sooner.
Did I hear this right? The FDIC is telling banks that the rates they pay people with cash to put in the bank 'must stay low'? We have the highest real interest rates in the last fifty years, and some banks want to narrow this spread and bring things back into line, and the FDIC is going to tell them no?
NPR needs to look into this...there is something else going on behind this with the FDIC...if they actually have this power, this is a clear abuse, and is needs to be exposed further....I would like to write to my member of congress to explain if I had more information....
