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Simpler national rate cap could help undercapitalized banks compete

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Simpler national rate cap could help undercapitalized banks compete

Banking regulators are simplifying the limit on deposit rates for banks with weak capital, a move that could help that cohort of banks compete in their local markets.

The Federal Deposit Insurance Corp.'s proposal would simplify how the national deposit rate cap for less-than-well-capitalized banks is calculated. The new cap will be the average of all rates paid on deposit products by FDIC-insured institutions, weighted by the company's deposit market share in the U.S. rather than by its branch count.

While there are only 16 less-than-well-capitalized banks as of June 30 data, the changing cap could affect examinations at healthy institutions as well. Bankers say regulatory examiners have advised well-capitalized banks to stay under the cap as a best practice for high-risk deposits. Aside from changing the rate cap calculation, the FDIC said it revised its supervision manual to clarify that the cap does not apply to banks with adequate capital.

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The new calculation will result in higher caps for most deposit products, with longer-duration CDs jumping the most. The national savings limit would rise to 1.05% from 0.84%, but the caps on 12- and 24-month CDs would both increase by more than 100 basis points, according to S&P Global Market Intelligence data.

The 16 undercapitalized banks range in asset size from under $50 million to nearly $500 million, as of June 30. Sevierville, Tenn.-based Sevier County Bancshares Inc., one of the larger institutions at $305.7 million, recently raised its capital levels but is still subject to the rate cap until its next FDIC safety and soundness exam. President and CEO Bobby Stoffle said the current method for calculating the cap is complicated, and the proposal adds a level of fairness for banks subject to the cap.

It "puts the local bank on more equal footing with its local competitors than the current process," he said.

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The Independent Community Bankers of America, which sent multiple suggestions to regulators about the rate cap, sees the proposal as an improvement but wanted the calculation to include promotional rates that can skew competition in local markets, said Christopher Cole, senior regulatory counsel at the ICBA.

The FDIC's notice of proposed rulemaking acknowledged the request to include promotional rates but said doing so would be "problematic" because institutions do not consistently provide that information.

Another limitation of the proposed rule is the exclusion of credit unions in national rate cap calculations, said Cole. Currently, credit unions' interest rates are not included in national rate cap calculations, and the proposal still excludes them. Community bankers say that puts them at a competitive disadvantage if local credit unions try to compete for deposits on rates.

However, the proposal still allows banks subject to the national deposit rate cap to offer up to 90% of the highest rate paid on a particular deposit product in an institution's local area, including local credit union rates — an exemption known as a high-rate determination.

Sevier County Bank currently has a high-rate determination letter, allowing it to better compete against local peers.

But "determinations are a thing that come and go. They've come and gone for us," said Stoffle. The bank's previous high-rate determination was removed in May and reinstated months later in mid-August, he said.

Another concern for less-than-well-capitalized institutions was the effect branch counts have on the current calculation. The current deposit rate cap is weighted by number of branches, meaning banks with few or no branches have little effect on the cap even if they offer high rates.

The new rule would weight institutions by their deposit market share instead.

"The proposed market share calculation is an improvement over the existing per-branch calculation because it gives more weight to internet banks — and the internet banks have been aggressive with the deposit rates they offer," Cole said.

Another major industry group, the American Bankers Association, praised the FDIC's clarification that the cap does not apply to well-capitalized banks. In a letter to the FDIC in March, the ABA said it had heard recurring reports that examiners were raising rate cap issues even with well-capitalized banks.

The FDIC is taking comments regarding the proposed rule over the next 60 days.

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