A recent change in a Federal Deposit Insurance Corp. rule requires that deposit rates offered by "less than well-capitalized institutions … not significantly exceed the prevailing rates in the applicable market area."
Though the rule change's intent is clear, those simple phrases pose significant challenges for some banks — and significant opportunities for others.
The phrase "less than well-capitalized" applies to a broad category of banks, including institutions — if they are subject to a capital maintenance provision as part of a consent order, cease-and-desist order, capital directive or similar agreement with their regulator — whose capital ratios actually exceed minimum requirements.
The FDIC has defined "significantly exceed" as "more than 75 basis points higher." But higher than what?
Using similar products, account tiers and maturities, the rates from the subject bank are compared to the average of others in the marketplace: The difference cannot be greater than 75 basis points. The regulation includes references to how promotional or teaser rates, gift offers etc. factor in to the comparison.
"Applicable market area" is less well defined. The starting point is a national average of rates from all insured institutions, published on the FDIC's Web site.
Upon request, the FDIC will review four product types to determine how well the national average represents the local marketplace. If the standardized rates for the bank's market exceed the national average for three or more of the products by at least 10%, the bank is in a high-rate area.
The regulation shows "market area" defined at the state level and at the level of the metropolitan statistical area and the "micropolitan" statistical area. The latter are Census Bureau definitions that do not coincide with city, county or ZIP code boundaries — so banks will probably have to redefine their existing trade areas.
If you are in a high-rate area, you can use the local-market approach, or the national average — but only one. So you must carefully assess which product or products are most important to you, compare your target rate with the local market and the national average, and determine which approach is better. The FDIC requires 30 days' notice for this determination — so you had better plan ahead.
If your bank operates a Web site, rates on those deposits are measured against the national rate for compliance with the 75-basis-point limit. And if your bank operates in a high-rate area, the local market approach applies to all locally gathered deposits, even from consumers in your local market who transact on your Web site. Thus, you may need to post two sets of rates on your Web site, structured so that people do not see both sets side by side.
Determine where your rates need to be to generate your required deposits, and compare those rates with the FDIC's national average. If they are more than 75 basis points higher, simulate your own market rate determination to see whether you are likely to be in a high-rate market. Before you request an official determination from the FDIC, examine the difference between national and local market rates for each product — especially for those you consider most crucial.
If you are well capitalized and free of any written agreements, do not rest on your laurels. One or more institutions in your market is likely to be subject to the deposit rate limit. This is your opportunity to capture share while your competitors sort out the new rule.
Most banks will take time to work through the particulars and more time for implementation. Some will simply limit their rates to within 75 basis points of the national averages. With a relatively small rate differential you can put distance between your bank and these others — and know that they won't soon be countering your move with an increase.
There are two sides to this rate cap: If your bank is subject to the limitation, you must react — quickly — by determining whether a "high-rate market" exclusion applies, obtaining the exception from the FDIC and promoting your rates. If you are not subject to the cap, target those competitors who are and price aggressively to garner share while their responses are hindered.
Either way, the FDIC rule change should be something your competitors have to worry about — not you.
