Limits on Interest Rates Proposed by FDIC Create Hope for More Liquidity

With banks already feeling the heat from lawmakers wanting to ensure sufficient capital and lending opportunities are available, the FDIC is now applying even more pressure as it proposes limits on interest rates. According to the FDIC, the limits will rest with the banks that lack enough capital to ensure liquidity.

One aspect of the FDIC’s proposal is to use a national interest rate on deposits, which would in turn abandon Treasury yields as a benchmark. However, this rule will likely apply to only about 2% of the bank population – namely those who fail to meet the “well capitalized” (Tier 1 ratio of at least 6%) requirement.

Here are a few additional aspects of the FDIC proposal:

• Banks should be barred from paying rates that exceed a national average plus 75 basis points.
• Banks should be limited in their ability to tap higher-cost source funds.
• The premiums paid to insure deposits should be based on the risks faced by banks that don’t meet the necessary regulatory requirements.

The proposal has met with some opposition, as concerns that these limitations might bring the nation one step closer to nationalism as it expands the government’s role with banks. However, the FDIC plans to march forward with the plan, releasing it for 60 days of public comment. The FDIC is taking this route hoping to lower the deposit rates that are being paid by some of the weaker banks, thus minimizing the risk involved with these banks offering higher rates. There is no official news on whether or not CD rates will be affected as well.

Do you think this proposal will lead toward an economic recovery, or is it just another step toward bank nationalization in the US?