While its house was burning down, BankUnited of Coral Gables, Fla., was on a deposit-gathering spree.
Florida's largest lender had been under the gun to reverse its negative Tier 1 capital ratio since being slapped with cease-and-desist order in September by the Office of Thrift Supervision. The institution was raking in the deposits with high-yield certificates of deposit and other savings instruments, paying what rates above those of competitors in the Miami/Dade County region. When the music stopped on May 21, its core deposits stood at $8.6 billion, up more than a 21 percent from the year before.
"Because everybody knew it was going to be taken over, we had what we call a reverse run," says Miami banking consultant and economist Ken Thomas. "People rush in to lock in the high-CD rates before the government takes them over, in fear that when the government takes over, they'll cut rates."
A recent rule change by the FDIC (in effect for 2010, but banks can use it now) intends to put a stop to that last-gasp practice of problem banks and thrifts offering high rates for quick-turn deposits and short-term liquidity. The new rate restrictions cap will, in most cases, prevent "less-than-well-capitalized" institutions (as defined by the FDIC) from paying above-average rates by requiring the use of new national standards to determine prevailing market rates.
Yet while the new rule will make it harder for weak banks to pay up for deposits, it could help them better compete for deposits because it will end up lowering their funding costs.
Under the new rule, rates for weak banks will be capped at 75 basis points above the average of what all institutions pay.
To most observers, it seems a common-sense fix, and one that FDIC chairman Sheila Bair said will correct some of the "subjectivity" of local rate calculations by examiners, which created inconsistent caps for banks and helped "drive up costs for the rest of the industry," she stated in a release. "Supervisors and banks need a simpler and more objective tool for achieving the statutory goal."
"This should be good for the industry," says Sherief Meleis, managing director and head of the retail banking with management consultancy Novantas. "The zombie banks out there that are barely surviving were pricing irrationally and making it tough for the rest of the industry."
Banks deemed less-than-well capitalized make up less than 3 percent of all institutions. But with nearly 200 distinct local rate markets, it's easy for one outlier to affect the market, says Meleis.
One key change is to disentangle the national-rate standard from Treasury bond rates and simply average current rates across the country. Because the old rules forbid weak banks to offer deposit rates above the prevailing rate in their market, they were unable to compete with healthy institutions as Treasuries declined, and thus were forced to pursue brokered deposits, which are inherently volatile.
By making the national average the de facto prevailing market rate, weak banks would not be boxed in by artificially low local market rates. The new rules can help such banks "gently turn the course of the ship," says Walter Mix, a Los Angeles-based managing director for LECG.
Yet while weaker banks might be able to win savings deposits, some observers say the FDIC could have done more to help them attract more funds to high-interest checking accounts, which, unlike CDs, can generate interchange and nonsufficient funds revenue. Paying just 75 basis points above the national average, currently 0.11 percent, would make it hard for these banks to compete for checking deposits with healthier institutions, especially Internet banks and credit unions. "A 2.5 percent CD, which they'll allow everyone to do everywhere, is costing a whole lot more money to the bank than a 2.5 percent high-interest checking account would," says Don Shafer, president of Bancvue, which markets high-interest rewards checking products for institutions.
But Steve Reider, president of consultancy Bancography, says the FDIC's move helps to de-emphasize price as a competitive bullet. "You've seen the implications of [high-cost deposits]," he says. Solid banks compete "on attributes other than price."