On January 27, 2009, the FDIC proposed to amend its regulation relating to interest rate restrictions on institutions that are less than well capitalized.  The proposed regulation would tie the interest rate caps to published national interest rates and eliminate the concept of local deposit market areas.

Section 29 of the Federal Deposit Insurance Act places statutory limitations on the ability of any insured depository institution that is not well capitalized to accept funds obtained by or through any deposit broker.  Because of the statutory definition of a deposit broker, these limitations also limit the interest rates which may be paid by insured depository institutions that are less than well-capitalized. In order to be considered well-capitalized, an institution may not be subject to any written agreement or order issued by its primary federal regulatory which requires the institution to meet and maintain a specific capital level for any capital measure.

Under the existing regulations, any institution that is not well capitalized (including any institution subject to a regulatory enforcement action with capital requirements) may generally not pay interest in excess of 75 basis points over the average interest paid for comparable deposits in the institution’s “normal market area.”

In recognition of the blurring of local deposit market boundaries brought about by the Internet and other innovations, the proposed regulation would instead establish a presumption that any institution that is not well capitalized (including any institution subject to a regulatory enforcement action with capital requirements) would not be permitted to pay interest in excess of 75 basis points over the prevailing national average rate, as published by the FDIC.

In the proposed regulation, the FDIC indicates that, based on data available to the FDIC as of January 4, 2009, the FDIC would have published the following schedule of “national rates” and “rate caps.”

  • Non-maturity Products – National Rate: 0.60; Rate Cap: 1.35
  • 1 Month CD – National Rate: 0.64; Rate Cap: 1.39
  • 2 Month CD – National Rate: 1.22; Rate Cap: 1.22
  • 6 Month CD – National Rate: 1.55; Rate Cap: 2.30
  • 12 Month CD – National Rate: 1.95; Rate Cap: 2.70
  • 24 Month CD – National Rate: 2.15; Rate Cap: 2.90
  • 36 Month CD – National Rate: 2.37; Rate Cap: 3.12
  • 60 Month CD – National Rate: 2.73; Rate Cap: 3.48

The proposed regulation was approved by the FDIC board unanimously, with all board members stating that they strongly support the clarity provided by the rule and implementing a uniform standard.  While the proposed regulation is currently out for comment, given the ambiguities associated with the phrase “normal market area” and the recognition by the FDIC in adopting the proposed regulation that local deposit market boundaries have been blurred due to the Internet, banks that are less than well capitalized will want to review whether their current rates comply with the proposed regulation.

The proposed regulation provides clarity to institutions and regulators as well as a bright line standard for whether particular interest rates are permissible.  However, the proposed regulation may also reduce the flexibility that regulators have had in handling unique circumstances.

Compliance with the existing regulation is both art and science; please contact us if you would like to discuss further.