Sunday, May 31, 2009

FDIC Will Dictate The Interest Rate on Deposits

Not a single day passes without more government entrepreneurship intruding into once-private, market decisions.

FDIC restricts interest rates at weak banks (Reuters UK, Friday 5/29/09):

"U.S. banks that are struggling to stay afloat will not be allowed to aggressively ratchet up interest rates to attract customer money, a top bank regulator said on Friday.

"The Federal Deposit Insurance Corp voted to bar a bank with insured deposits from paying interest rates that "significantly exceed" prevailing market rates if the bank is deemed not well capitalized. The new rule better defines what constitutes normal market rates, the FDIC said.

"The interest-rate rule comes as many smaller regional banks are weighed down by bad loans and credit losses. The FDIC said on Wednesday that the number of banks on its "problem list" grew 21 percent in the first quarter to 305 institutions -- the highest number since 1994."

Soooo, let me get this right. Many US smaller regional banks are struggling. They need to attract more money from the depositors. They think they can offer a higher interest rate than the big national competitors. In comes FDIC and tells them they are not allowed to offer a higher rate, and FDIC will tell them what's the fair market rate is. [Ummmm if FDIC decides what the market rate is, it's no longer a "market" rate, is it?]

I went to FDIC's site, and found this new interest-rate rule, here. It says "An institution not choosing to use the national rate [which FDIC will calculate (simple average) and publish weekly] can define its market area and support its position to the FDIC that prevailing rates in that area exceed the national average. "

So, banks will have to defend their position if they want to offer more than this FDIC-determined national average.

It seems FDIC is telling these struggling regional banks to get lost, literally.

How "well-capitalized" is FDIC itself? The answer is NOT AT ALL. FDIC's Deposit Insurance Fund (DIF) plunged to just $13 billion, which insures [HOW??] $4.8 trillion. That's 0.27%. FDIC is also supposed to be covering those corporate bonds issued with FDIC guarantee.

That sounds far worse than AIG writing away CDS, doesn't it?


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