The Federal Deposit Insurance Corp. board of directors voted today on a proposed rule that would limit the interest rate that banks that fall below “well-capitalized” could offer on deposits, such as certificates of deposit.
Presumably the rule is to prevent more banks from taking on too much brokered deposits. Brokered deposits are deposits that a bank gains by offering above-market interest rates on CDs to large depositors. When the CD term ends, the deposits — which can total in the hundreds of thousands or millions of dollars — leave the bank as quickly as they come, and in certain cases can cause the bank to immediately become illiquid.
Brokered deposits have been linked by regulators to the failure of several banks in the past 12 months, including ANB Financial in Bentonville, Ark.
The FDIC says it expects the rule to affect a small percentage of banks. It says in third quarter 2008 about 154 of more than 8,300 banks nationwide were under the well-capitalized mark.
The FDIC considers a bank well capitalized if it has a total risk-based capital ratio of at least 10 percent.
2 Comments
Probably makes sense. “Hot assets” have been a part of the problem for years; banks paying above-market rates to get money to gamble with, knowing the taxpayers will be on the hook if their gambles fail.
Utilizing brokered deposits is not an absolute sign that a bank is “troubled”, but “bth” is right that they’ve been a part of the problem. The proposal to apply the interest rate limitation to banks below “well capitalized” seems reasonable. It will also mitigate strong banks from being pressured into paying higher rates by the weakest and most desperate competitors.