On May 29th, the FDIC issued a ruling [PDF] that would limit future interest rates offered by FDIC-insured banks which were deemed “less than well-capitalized”. This was viewed by some as a response to a complaint filed earlier with the FDIC by the American Bankers Association (ABA), a bank lobby group representing all the mega-banks. The ABA said that it was unfair that Ally Bank could offers such high interest rates when its parent GMAC was accepting government assistance.
How weak is weak?
A bank can be classified as “well-capitalized”, “adequately-capitalized”, and different levels of “under-capitalized”. An insured depository institution is “well capitalized” if it “significantly exceeds the required minimum level for each relevant capital measure” set by the FDIC. According to this Bloomberg article, only 3% of banks are not well-capitalized.
Rate cap details
If a bank is not well-capitalized, then it cannot offer interest rates greater than 0.75% higher than the “national rate”, which is just an average of rates paid by all U.S. depository institutions. As of June 1st, these maximum rates would theoretically be:
Not exactly yields I’d whip out my SSN for. I dislike the idea of messing with free markets and competition, but I can see how the FDIC would want to prevent weak banks from offering high yields as a last ditch effort at survival, only to end up needing even more FDIC funds. However, using an average can be misleading as there are plenty of big banks (ABA members *cough*) with piddly yields for no good reason besides they have inertia and can get away with it. Of course some banks will offer yields well above market to attract money. How else do you propose they do it?
Not as bad as you think
This announced stirred up a lot of speculation that a bunch of high-yielding banks like Ally would soon be forced to lower their rates. But we have already seen that only 3% of banks are not well-capitalized, so there will still be 97% of banks competing to get our money. Also, the ruling does not become effective until January 2010, so rates aren’t going to be capped any time soon.
Specifically, the GMAC/Ally Bank CEO Molina has just publicly responded by stating that Ally Bank is definitely well-capitalized, in fact better capitalized than some of the ABA’s members. Ha!
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Yup, they’re well capitalized, moreso than most (“Tangible equity” is a good measure of capitalization, and they’ve got a healthy amount of it): http://www.bankfox.com/health/ally-bank/
Of course they’re only “well-capitalized” because the government has invested so much in it. Which means the new rule will only really affect banks that are under-capitalized but too small to get government funding. Seems a little arbitrary to me.
Gov’t injections: http://www.detnews.com/article/20090520/AUTO01/905200376/Feds-to-inject-$7.5B-more-into-GMAC.
This article was posted 4 weeks ago: http://blogs.reuters.com/felix-salmon/2009/05/07/the-stress-tests-biggest-loser-gmac/
It indicates that GMAC is in fact the MOST undercapitalized bank. If Ally Bank is so well capitalized, why don’t they show some numbers or at least somehow prove that they are well capitalized? Where is your source where the CEO says they are well capitalized? Is it just their word vs the governments?
“I dislike the idea of messing with free markets and competition”. Where have you been? The fact the government didn’t just step in, wipe out the shareholders and take a 90% ownership stake in these banks is a step toward free markets. Catch up to the new America.
If the banks’ risks are backstopped by FDIC, they have every reason and obligation (on behalf of the taxpyers) to stop these banks from taking excessive risks (i.e. offering high deposit interest rates). Banking is not a free market as long as they have taxpayer backing in the form of FDIC.
It’s funny- in the case of Ally, they are well capitalized because they have high interest rates and can have high interest rates because they are well capitalized. Classic grandfathering
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The ABA leadership is not elected by the voters and certainly not bank depositors. But they have the power to make the government change its policy. Roosevelt use to call this type of power the shadow government. Obviously if you’re looking for the best return you can get on your savings it’s going to get harder. The result is us sheeples will start looking for better returns that aren’t FDIC protected to some extent.
If we open a CD with Ally before the ruling and they decide to cap the rates, what happens with the CD?
Todd – Nothing, your rate would already be locked in. I would lock in your CD rates with Ally sooner rather than later anyways right now, as they do seem to be well above average in order to attract deposits. Once they get enough deposits, they will probably drop CD rates.