Rate cap for weak banks is sought

Savers have long been able to take advantage of the above-average interest rates that weak banks pay to attract deposits. But those days may soon be over.

The Federal Deposit Insurance Corp. on Tuesday proposed new limits on rates paid by banks that have less-than-adequate capital.

The agency would throw out its current complicated formulas for determining maximum interest rates at weak banks and replace them with a relatively simple formula: The new cap for each product would be 0.75 of a percentage point over the national average rate.

“The idea is to prevent these banks from acting in a way to compound losses to the FDIC,” Chairman Sheila Bair said at the agency’s board meeting in Washington, according to Bloomberg News.

If the rules were in place now, the FDIC said, a weak bank would be limited to paying 2.3% on a six-month certificate of deposit. That would be 0.75 of a point above the national average rate early this month of 1.55%, according to FDIC data.

According to Bankrate.com, 11 banks, mostly small institutions, on Tuesday were offering rates above 2.3% on six-month CDs. The highest rate offered was 2.91%.

Faced with mounting lender failures, the FDIC is trying to limit its losses when it takes control of banks and honors its insurance commitment to savers. The agency insures up to $250,000 per customer, a limit that was raised from $100,000 last year.

Just before Pasadena-based IndyMac Bank failed in July, it was offering the highest rates in the nation on six-month and one-year certificates of deposit. IndyMac’s six-month CD rate was 4.10%, compared with a national average of 2.23% at the time.

The FDIC had 154 banks on its list of undercapitalized institutions as of Sept. 30, out of a total of 8,300. The agency doesn’t disclose the names of the banks.

The FDIC will take comments on its proposed changes for 60 days.

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