WASHINGTON — A Federal Deposit Insurance Corp. rule finalized Friday will tighten deposit rate restrictions on institutions short on capital while loosening rules for healthier banks.
The regulation was one of six actions taken by the FDIC's board, which also established a special advisory committee on community banks, amended the agency's temporary debt guarantee program and passed rules implementing the Fair and Accurate Credit Transactions Act.
The rate rule aims to streamline restrictions on institutions that are below well-capitalized status, correcting ambiguities that allowed some banks to escape such constrictions. With some exceptions, rates will be capped at 75 basis points over an average of what all institutions pay nationally.
"The ambiguities in the current process have led to a lot of subjectivity, and that subjectivity in turn has allowed some … banks to drive up costs for the industry," FDIC Chairman Sheila Bair said at the board's meeting.
Well-capitalized banks are generally unrestricted in the rates they can pay, but those that fall below that mark face limits tied to both local and national deposit trends.
The restrictions are an attempt by regulators to stop weaker banks from offering exorbitant interest rates to attract funds. Should such a bank fail, its resolution costs could be higher.
Some banks have been able to skirt restrictions by relying on ambiguous terminology. For example, weaker banks generally are not allowed to pay rates higher than local market rates, but there was no clear definition of what that meant, allowing some banks to stretch the standard in their favor.
"There has been this issue about inconsistent application," said Comptroller of the Currency John Dugan, an FDIC board member.
The rule aims to establish a national rate, an average of what all institutions are paying on deposits. That rate, which the FDIC will publish on its Web site, could vary according to the type of deposit and the maturity. Weaker banks will be allowed to pay only 75 basis points above the national rate, though they can appeal to the FDIC for a waiver.
The agency said it plans to publish national rates immediately, but it will give institutions until Jan. 1 to comply with the rule.
The definition of a national rate could help some less-than-well-capitalized institutions. Previously, adequately capitalized banks that received a waiver from the FDIC to take brokered deposits could not pay more than a certain percentage above comparable Treasury bonds for out-of-market deposits. But those bonds have fluctuated dramatically during the housing crisis, often hitting abnormal lows that severely restricted what they could pay.
"This is a more restrictive result than the statute calls for," said George French, a deputy director in the FDIC's division of consumer protection.
The new national rate will not be tied to Treasury bonds, and it may give adequately capitalized banks more flexibility to pay higher interest rates on out-of-market deposits.
According to a board memo, the new Advisory Committee on Community Banking is meant to advise the agency "on a broad range of policy issues that have a particular impact on small community banks and the communities served by such banks, including a focus on rural areas."
"It is very important that we get input from the community banking sector," Bair said. "They are of vital importance to our economy in these difficult times."
FDIC Vice Chairman Martin Gruenberg said the recent crisis has improved the reputation of small institutions that stay true to traditional banking. "One of the lessons we draw from the recent experience of the financial system is the importance of the community banks...and in some sense the renewed appreciation for the business model that community banks rely on of core deposits and knowing your customers well."
In the memo, the agency proposed that the majority of the committee members come from community banking institutions "of various sizes and charter types, both rural and urban, including a cross-section of institutions from different regions of the country."
The agency also finalized a March 17 proposal amending its Temporary Liquidity Guarantee Program. The final rule, which left the proposal unchanged, gives institutions four more months — until Oct. 31 — to issue debt covered by the agency, but it adds fee surcharges to banks using the extended program.
The rule also established that new fees from the program, which previously had been kept separate from the Deposit Insurance Fund, could be used to build the fund's reserves.
The FDIC also finalized two rules that implement the FACT Act. One rule requires companies that provide data to credit bureaus to establish written policies ensuring the accuracy of the information. The other requires companies providing credit data to investigate disputes in which a consumer claimed information was inaccurate.
