Fallout: The Financial Crisis

FDIC limits weak banks’ interest rates

Janet Babin May 29, 2009
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Fallout: The Financial Crisis

FDIC limits weak banks’ interest rates

Janet Babin May 29, 2009
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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.

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