Alert February 03, 2009

FDIC’s Proposed Revisions to Interest Rate Restrictions on Institutions that are Less than Well-Capitalized

The FDIC proposed a rule (the “Proposed Rule”) that would make certain revisions to the interest rate restrictions in its regulations regarding brokered deposits to provide greater flexibility to institutions that are not well-capitalized.  The Proposed Rule would address concerns caused by the fact that the U.S. Treasury bond-yield benchmark for brokered deposits of such institutions under the current rule is abnormally low, making it difficult for the institutions to attract brokered deposits due to compressed limits on permissible brokered deposit rates.

Under existing Part 337.6 of the FDIC’s regulations, a bank or thrift that is less than well‑capitalized may not pay an interest rate that significantly exceeds the prevailing rate in the institution’s market area or the market area in which the deposit is accepted.  For out-of-area brokered deposits the rate to be followed is the “national rate,” which is defined as 120 percent of the current yield on similar maturity U.S. Treasury obligations.

The Proposed Rule would redefine the “national rate” for purposes of the rule to be “a simple average of rates paid by all depository and branches for which data are available.”  In other words, the prevailing rate in all market areas for deposits of similar size and maturity would be the “national rate.”  As an alternative, the FDIC also would permit an institution that believes the prevailing rates in its area exceed the national average to redefine its market area, provided, however, that the institution must overcome a rebuttable presumption that the national rate should be used by providing support to the FDIC of the existence of such higher local rates.  

To provide institutions with the rate information needed to comply with the Proposed Rule, the FDIC would publish a schedule of “national rates” by maturity.  The rate caps for such deposits, which would be the national rate plus 75 basis points, also would be provided.  Comments on the Proposed Rule are due by April 6, 2009.