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Banks with low capital levels will be better able to attract deposits under new interest rate rules federal regulators announced Friday. The changes make it easier for the affected banks to pay competitive rates. The first change makes it easier for affected banks to offer all depositors rates based on the national rate, rather than prevailing market rates. That change will make them more competitive with banks that solicit customers over the Internet. The second change alters how the FDIC calculates the average national rate paid on deposits. Ensuring that weaker banks can lure depositors is important to regulators because deposit are the cheapest source of funds. Although the changes do not become effective until the beginning of 2010, the FDIC said it "does not object" to banks taking advantage of them immediately. The calculation of the national rate is important to less-than-well-capitalized banks because they are forbidden to pay rates above local market or national rates as defined by the FDIC. Currently the national rate is pegged to rates paid on Treasury bills. Declines in Treasury rates, both in real terms and relative to bank certificate of deposit rates, have put less-than-well-capitalized institutions at a disadvantage in attracting deposits because the national rates have fallen below rates offered by better-capitalized competitors. The new rules, announced in a supervisory letter sent to financial institutions, redefines the national rate as "a simple average of rates paid by all insured depository institutions and branches for which data are available." In other words, the prevailing rate will be deemed to the average of rates being paid in all market areas across the country as defined by the FDIC. Under current federal rules, a less than well-capitalized insured depository institution may not pay rates that significantly exceed 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 is currently defined as 120% of the current yield on similar maturity U.S. Treasury obligations. The FDIC said it originally linked the national rate to Treasury yields because it was difficult to obtain timely and reliable data on prevailing certificate of deposit rates. However, technological advancements and more current information now make it possible to calculate prevailing national rates in a timely manner. The FDIC will publish a weekly schedule of national rates and national interest-rate caps by maturity. The rule also assumes any depository institution will use the national rate as a proxy for the prevailing rate in an institution's local market area because of the increasing prevalence of Internet deposits and Internet advertising that has led to price competition increasingly national in scope. There are also "considerable practical difficulties in ascertaining the origin of the deposit and calculating the prevailing rates paid within that area" that the new approach avoids, the FDIC said. If an institution does not want to use the national rate, 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. A new process for establishing local rates will be spelled out in a subsequent letter before the Jan. 1, 2010, implementation of Friday's rule changes. - Bill McConnell Summary and highlights of the FDIC's changes
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