FDIC CD rate caps?

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Tamales
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FDIC CD rate caps?

Post by Tamales » Thu Jun 04, 2015 9:33 pm

Can anyone explain what this means?
https://www.fdic.gov/regulations/resources/rates/

There are clearly many "online banks" such as Synchrony, Ally, Barclays that exceed the rate cap by a large margin (and their CDs are all FDIC insured).

What's the story?

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dm200
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Re: FDIC CD rate caps?

Post by dm200 » Thu Jun 04, 2015 9:43 pm

Tamales wrote:Can anyone explain what this means?
https://www.fdic.gov/regulations/resources/rates/
There are clearly many "online banks" such as Synchrony, Ally, Barclays that exceed the rate cap by a large margin (and their CDs are all FDIC insured).
What's the story?
The "key" (perhaps you may be missing) is that (as stated in the linked item) applies only to less than well capitalized banks. It is NOT a general rate cap. I did not look them up, but if the banks you mention are "well capitalized" - this does not apply at all.

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Tamales
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Re: FDIC CD rate caps?

Post by Tamales » Thu Jun 04, 2015 10:20 pm

Yes, that's the part I don't understand. Are only the 10 largest banks considered well-capitalized? Or the top 50% top 90%?

Searching around a bit I found this (which really isn't much help):
Well capitalized if the bank:
(i) Has a total risk-based capital ratio of 10.0 percent or greater; and
(ii) Has a Tier 1 risk-based capital ratio of 6.0 percent or greater; and
(iii) Has a leverage ratio of 5.0 percent or greater; and
(iv) Is not subject to any written agreement, order, capital directive, or prompt corrective action directive issued by the FDIC pursuant to section 8 of the FDI Act (12 U.S.C. 1818), the International Lending Supervision Act of 1983 (12 U.S.C. 3907), or section 38 of the FDI Act (12 U.S.C. 1831o), or any regulation thereunder, to meet and maintain a specific capital level for any capital measure.

Later I found a 2009 article which says, according FDIC, 96% of banks are well-capitalized, but FDIC won't disclose the list of those that aren't. Huh?
Oh well, I guess that's enough info to say it's seldom going to apply.

And also this: "It is possible for a bank to technically be well- capitalized, yet receive poor-enough scores in other areas of its CAMELS rating to land on the problem bank list.

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Re: FDIC CD rate caps?

Post by Cyclone » Fri Jun 05, 2015 12:52 am

You are making it complicated, and it isn't something a consumer has to worry about anyway. If a bank is not well-capitalized, their deposit rates cannot be above a certain rate. If you aren't happy with the rate a bank offers, use another bank. As far as safety, if your deposit is under $250,000 there isn't anything to worry about.

Yes, a bank can be well-capitalized but have other problems (asset quality, management, earnings, liquidity, and interest rate sensitivity are the other letters in "CAMELS").

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dm200
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Re: FDIC CD rate caps?

Post by dm200 » Fri Jun 05, 2015 11:49 am

1. I agree that you (OP) are making this much more complicated than, IMO, is necessary or relevant. As long as you stay under the FDIC insured amount, your money is safe and protected. if a bank fails, then there is some degree of "call risk", but banks that are not "well capitalized" can and do fail.

2. My guess is that oever 90% of banks are "well capitalized". While the exact list of those not so classified may not be public, the net worth ratios and the basic financials of the banks are public information - just as are such information for federally insured credit unions (almost all US credit unions are federally insured).

3. If a bank or credit union is restricted in the rates they can pay/offer by law, regulation or other restriction, then you are perfectly free to put your money in a bank or credit union paying higher rates.

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Tamales
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Re: FDIC CD rate caps?

Post by Tamales » Fri Jun 05, 2015 9:13 pm

I'm not making anything complicated, I simply asked a question about FDIC caps, which I had never come across before. I found the answer on how the cap is defined and the extent of applicability. You both read things into my question that weren't there, about some complicated scheme I was going to undertake, and then proceeded to answer some different questions I didn't even ask. There is no scheme; I'm not about to buy a CD. It was straightforward question about what they are, and nothing else.

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Archie Sinclair
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Re: FDIC CD rate caps?

Post by Archie Sinclair » Sat Jun 06, 2015 4:46 pm

Tamales wrote:I'm not making anything complicated, I simply asked a question about FDIC caps, which I had never come across before. I found the answer on how the cap is defined and the extent of applicability. You both read things into my question that weren't there, about some complicated scheme I was going to undertake, and then proceeded to answer some different questions I didn't even ask. There is no scheme; I'm not about to buy a CD. It was straightforward question about what they are, and nothing else.
I think these good people were just trying to help you by answering your question. I've studied banking law, so I could answer the question, but this kind of response doesn't motivate me to do so.

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Re: FDIC CD rate caps?

Post by HP-12Cing » Sat Jun 06, 2015 8:36 pm

The minimum capital ratios to remain in the Well Capitalized category for Prompt Corrective Action purposes have changed now that the new capital rules (Basel III) are in effect. According to Part 324 of the FDIC's Rules and Regulations:
Capital categories. For purposes of section 38 of the FDI Act and this subpart, an FDIC-supervised institution shall be deemed to be:
"Well capitalized" if it:
(i) Has a total risk-based capital ratio of 10.0 percent or greater; and
(ii) Has a Tier 1 risk-based capital ratio of 8.0 percent or greater; and
(iii) Has a common equity tier 1 capital ratio of 6.5 percent or greater; and
(iv) Has a leverage ratio of 5.0 percent or greater; and
(v) Is not subject to any written agreement, order, capital directive, or prompt corrective action directive issued by the FDIC pursuant to section 8 of the FDI Act . . .
Banks file standardized financial statements quarterly that are commonly referred to as Call Reports. The Call Reports contain the above-referenced ratios, which are subject to (non-public) change as a result of bank examinations, visitations, etc. The fifth item in the list above that references written agreements, orders, etc. refers to public documents such as enforcement actions.

If a bank falls to a category below Well Capitalized, the rate restrictions you noted can come into play. The regulations are written to where a bank can't obtain any new brokered deposits or renew any existing ones. The way the regulation is written, any deposit on which the bank pays over 75 basis points above the national rate is considered a brokered deposit, even if it's a local deposit. Some exceptions come into play for banks that operate in market areas where the local deposit market is priced higher than the national averages.

In the end, it really shouldn't matter from the consumer's point of view what their bank's PCA category is. If you are investing in a CD at an FDIC-insured institution and like the rate, go for it. You can always check at https://research.fdic.gov/bankfind/ if you're unsure. Someone alluded to it above, but unless your deposits are partially uninsured, the only risk you face with a bank failing is that the acquiring bank will reduce the rate being paid on your deposit.

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Tamales
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Re: FDIC CD rate caps?

Post by Tamales » Sat Jun 06, 2015 8:43 pm

Hi Archie, I really don't know what your objection is, but my apologies all the same. I was just trying to clarify that my question was a very straightforward one and they read things into it that weren't there. There was no complication intended. I guess I should have chosen different words.

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Re: FDIC CD rate caps?

Post by LadyGeek » Sat Jun 06, 2015 9:15 pm

Hi Tamales,

There's no need to apologize. You've asked the right question, we've just answered in much more detail than you expected.

Remember that this is an investing forum whose members eat this stuff for lunch. It's very difficult to know where someone's level of experience lies. If you don't understand something, by all means let us know and we'll try again.

It's also difficult to convey ideas in an anonymous internet forum. Ideas can be misspoken or misunderstood, and then the reader may not feel comfortable posting here. We certainly don't want that to happen.

If anyone feels uncomfortable regarding a certain post, please report the post using the "!" in the top right corner of the post and the moderators will take care of it.
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