WASHINGTON -- Regulators gave the nod Thursday to a new tax-deferred certificate of deposit that could help the banking industry win its battle with insurance companies for core savers.
The Retirement CD is expected to receive federal deposit insurance today, and that will give it a competitive advantage over annuities sold by insurance companies.
The Office of the Comptroller of the Currency issued a "no objection" letter Thursday to a tiny Montana bank, Blackfeet National Bank, which serves as the agency's approval of the product.
Blackfeet notified the OCC in November that it planned to begin offering the deposit account, but delayed its release for six months while the agency studied the product.
OCC chief counsel William P. Bowden Jr. predicted the Retirement CD will be popular.
"I think there is quite a bit of interest in this, particularly from the larger banks," he said in an interview yesterday. "I think the growth of the annuities market generally has been quite steep and that will attract people."
The Retirement CD was created by American Deposit Corp., a company in Pine, Colo., headed by Richard E. Fasold. His partner is Washington lawyer Dennis Gingold, who found the nonbank loophole in the 1980s. American Deposit has a patent pending on the CD and hopes to license it to banks around the country.
"We think it is a big, big product," Mr. Fasold said Thursday. "This is an instrument that should assist banks get that long-term core deposit."
Since 1990, banks have lost about $800 billion in consumer CDs, he said. "There is a huge market and a huge demand for a product of this nature."
The Retirement CD works like this: A customer makes a deposit and receives a set interest rate for the first one to five years. After that term expires, the rate fluctuates based on the bank's cost of funds, but it will never fall below 3%.
According to legal opinions solicited by American Deposit Corp., customers do not have to pay taxes on the interest as it accumulates. The company did not get a formal Internal Revenue Service ruling, however.
The customer selects a maturity date and may withdraw up to two-thirds of the principal and interest on that date. Then the customer receives a periodic fixed payment for the rest of his life. The bank is on the hook for these payments even if the customer lives longer than expected and collects more money than he deposited.
The Comptroller's letter came with 17 conditions, the first of which singled this feature out and suggested that Blackfeet hedge its payment obligations.
The OCC also was concerned that Blackfeet make full, accurate, and obvious disclosures about the account to its customers. The OCC particularly noted that any deposit insurance limits be revealed conspicuously.
FDIC spokesman Alan J. Whitney said Thursday he expects the agency to declare the account an insured deposit today, but he hinted there may be some limits. He would not elaborate.
Jack Kelly, president of the $12 million-asset Blackfeet, said the bank received about 300 inquiries after advertizing the account last fall.
He expects the account will pull in $3 million to $4 million in core deposits.
When the Retirement CD first surfaced, the insurance industry vowed to fight the product in court.
Gary Hughes, a vice president at the American Council of Life Insurance, said the association is still disgesting the opinion and has not yet decided what to do.