Alert June 02, 2009

FDIC Adopts Final Rule Concerning Interest Rate Restrictions on Institutions that are Less than Well-Capitalized

The FDIC adopted a final rule (the “Final Rule”) that makes certain revisions to the interest rate restrictions in the FDIC’s regulations regarding brokered deposits to provide greater flexibility to institutions that are not well-capitalized.  The FDIC stated that the Final Rule addresses concerns caused by the fact that the U.S. Treasury bond-yield benchmark for brokered deposits of such institutions under the current rule has been volatile and is currently 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 currently defined as 120 percent of the current yield on similar maturity U.S. Treasury obligations.

The Final Rule, which is substantially similar to the FDIC’s proposed version (discussed in the February 3, 2009 Alert), redefines the “national rate” for purposes of the Final Rule to be “a simple average of rates paid by all depository institution and branches for which data are available.”  In other words, the prevailing rate in all market areas for deposits of similar size and maturity under the Final Rule will be the “national rate.”  The FDIC stated that this approach in the Final Rule reflects increased national competition for deposits because of the increase in Internet deposits and Internet advertising of deposit rates.

As an alternative, the FDIC also will 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.  The FDIC said that it would issue written guidance on the process that a financial institution should use to support its proposed usage of a local rate.

To provide institutions with the rate information to comply with the Final Rule, the FDIC will publish a schedule of “national rates” by maturity.  The rate caps for such deposits, will be the national rate plus 75 basis points.  The FDIC said that it will post separate rates and rate caps for: (1) NOW accounts; (2) Money Market Deposit Accounts (MMDAs); and (3) savings accounts (other than MMDAs).  The Proposed Rule will be effective on January 1, 2010.