FDIC Establishes A National CD Rate
March 5th, 2010
The FDIC has basically established a national rate for CDs. You’ll find it quite difficult to find any bank offering above 1.60% for 1-year CDs. You may be wondering why. Starting January 1, 2010, under capitalized banks have to set rates at or below the Weekly rates that the FDIC publishes. Here is a link.
What is interesting that even healthy banks are deciding to follow the rate cap. I guess they figure if the FDIC thinks that is a “good” level they might as well fall in place. Many are even offering lower rates. We have even heard of some pressure from bank examiners telling banks, healthy or not, that they shouldn’t be paying rates higher than the cap.
Honestly, when the law was passed I didn’t really see this as the outcome. I thought it might make it harder for the unhealthy banks to raise deposits and thus decrease potential losses if the bank fails. I see the opposite happening. With many healthy banks posting lower rates, the unhealthy banks are still able to easily bring in deposits.
Regardless it is very frustrating to see the government stepping in so strongly to basically regulate the rates that banks pay. It is also interesting to note that although banks haven’t strayed too far from the posted CD rates, many are still out there with high yield savings and checking account specials.
Another interesting development is to see banks work around the caps with creative penalties. For instance we have seen a couple of banks offer 2-Year rates with a zero penalty after 1-year. That effectively allows them to use the higher 2-year rate for a 1-year CD. Also goes to show you that creativity can “trump” governmental restrictions. Also goes to show you that governmental restrictions are rarely thought out well enough and often have the opposite effect of what was hoped or intended.
Two good notes. Credit Unions are not regulated by the FDIC and thus have no rate cap. There are still a few out there posting 2% or above for 1-year CDs. Secondly, there is a bank with a 2Y at 2.53% APY with a 1x bump and a 3Y at 2.79% APY with a 2x bump. Shoot a message and use the magic words, “Awesome Rates” and I’ll give you a 20% discount from our normal fee.
[Update 3/11/10: The 2Y bump rate dropped to 1.88% and the 3Y dropped to 2.21%. At this point a 5-year with a low closure penalty may be the best option]
Have a great weekend.
cd :O)
-- By Chris Duncan
ALLY BANK
60 DAY Penalty
Thank you for that note. Is that for CDs that are 1-year or less?
cd :O)
The American Banking Association (ABA) and it’s President, Mr. Yingling, brings a lot of influential pressure on the FDIC to persuade banks to hold deposit rates down. The ABA mainly represents the “too big to fail” banks who generally offer the lowest rates to savers. They don’t like competition from the smaller institutions. A good example is how they got the FDIC to pressure Ally Bank to significantly lower their deposit rates. Additionally, the ABA is always trying to get Congress to put limits on credit unions as far as membership restrictions and product limitations.
Two Notes. First the 60-Day Penalty at Ally Bank is supposed to be on all CD terms although some other forums have indicated that Ally Bank representatives had refused to say that it wouldn’t change in writing. However, penalty disclosures are part of the CD when it is issued and it is a contractual agreement. So if your disclosure indicates the 60-Day penalty, you should be okay. On the other hand, if a bank refused to honor it, you would have to take them to court. The FDIC doesn’t weigh in on those type of issues.
Secondly, interesting feedback on the ABA. I’ve read that charge elsewhere. If it is true, they should consider changing their name to MegaBanks-R-Us or something.
cd :O)