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FDIC proposes simplifying rate cap for banks with weaker capital

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FDIC proposes simplifying rate cap for banks with weaker capital

The Federal Deposit Insurance Corp. issued a proposed rule that aims to simplify the cap on interest rates that less-than-well-capitalized financial institutions can offer on brokered deposits.

The FDIC said the national rate would be the weighted average of rates paid by all insured depository institutions on a particular deposit product, and the weight will be represented with each institution's market share of domestic deposits. The national rate cap would be defined as the 95th percentile of rates paid by institutions weighted by each of their market share of total deposit products or the proposed national rate plus 75 basis points.

The FDIC is also proposing to allow less-than-well-capitalized financial institutions to offer up to 90% of the highest rate paid on a particular deposit product in an institution's local area, in an effort to simplify local rate cap restrictions. That could allow those banks to offer higher rates in a bid to attract more deposits.

In December 2018, the regulator began to seek public comments on the matter, saying a review was needed due to significant changes in technology, business models, the economic environment and products. The FDIC said while most institutions use brokered and higher-rate deposits well, these could lead to rapid exposure to risky assets if not properly controlled.

A majority of the comments received by the FDIC indicated that the calculation of the current national rate cap is too low because large banks with the most branches have an outsized effect on the national rate. Commenters argued that these banks have been too slow to raise their rates despite community and online banks raising theirs. The sway of big banks has led to the dwindling significance of online banks' rates, which tend to be high, in the calculation of the average.

Other commenters questioned whether there should even be a formula. They argued that there is no accurate method to calculate the cap given that, due to technological advancements, depositors can now shop for the best yields on a national level. Some commenters also argued that interest rate caps can increase the likelihood that less-than-well-capitalized financial institutions fail, as they will lose out on competing for deposits from other banks because they have to face restrictions other banks are not subject to.