Rate cap relief from FDIC doesn't go far enough, banks say
WASHINGTON — A proposal to ease interest rate restrictions that less than well-capitalized banks face relies on faulty methodology and ignores competition from fintechs and credit unions, according to the banking industry.
The Federal Deposit Insurance Corp. issued a plan in September to revise the regulation, which was implemented in 1992 in an effort to stop riskier banks from attracting deposits by offering above-market interest rates as a last ditch effort to avoid or delay insolvency. Though the industry supports the agency's intent, it says the new plan, which would revamp the rules and methodology around the interest rate restrictions, is too little, too late.
"The proposal fails to achieve an essential goal: establishment of a robust and transparent market based methodology that produces a rate that accurately reflects the cost of deposits through varied business models and economic environments,” wrote Alison Touhey, vice president of bank funding policy for the American Bankers Association, in a Nov. 4 letter to the agency.
Banks have complained for decades that the way in which interest rate restrictions are calculated is imperfect and overly restrictive for struggling banks, often pinning them to rates they say are actually below market. When FDIC Chairman Jelena McWilliams took office last year, she pledged to help address the issue. The FDIC plan suggests a series of changes, including a shift to making national rates based on the weighted averages of specific products and simpler calculations for determining local rate caps.
Currently, the FDIC prevents less than well-capitalized banks from offering an interest rate higher than whatever the agency determines is the current national rate plus 75 basis points. That national rate is a “simple average” of the rates paid by all the banks the FDIC insures and their branches based on available advertised rates from banks.
Under the proposal, the agency would make two changes to that existing methodology. Instead of a simple average, the FDIC would use a weighted average that balances a bank’s market share and branches across different products. The actual cap would then be the higher of two metrics: either the 95th percentile of rates by category after being weighted, or the FDIC’s national rate plus 75 basis points.
But banks insist that the tweaked methodology is still flawed. That includes the data the FDIC uses for its calculations, which is mostly "scraped" from the front end of bank websites. As an industry practice, data scraping has long been disparaged as unreliable.
“The underlying data are gathered by a third party, which only collects advertised bank rates, excluding any specials, deposits for which the bank and customer have negotiated the rate, and deposit like products offered by non-bank competitors,” Touhey wrote. “Use of these data to calculate the national rate cap will continue to result in an inaccurate, incomplete rate that does not reflect the cost of deposits at any given time.”
The ABA, the Independent Community Bankers of America, the Bank Policy Institute and others are instead pushing for a “market-based” rate solution tied directly to Treasury Department yields and other federal financial data.
“The ICBA still urges the FDIC to base the national rate caps on the greater of the original pre-2009 restrictions, which was 120% of the current yield of similar maturity U.S. Treasury obligations,” wrote Chris Cole, senior regulatory counsel with the group, “or the post-2009 restrictions except that the rate cap should be 100 basis points higher than the national rate, not 75 basis points higher.”
The ABA also suggested that the FDIC should explore creating a “periodically reviewed list of allowable alternatives” to a national rate cap.
“For those uncommon times when a market based national rate might not be the best gauge of a bank’s cost of deposits, we encourage the FDIC to allow all banks to opt for the most appropriate alternative rate," wrote Touhey.
Those rates could incorporate data from Federal Home Loan banks or be a percentage of the rates of competitors — the ABA suggested 125%.
Several industry groups also took issue with the FDIC’s decision to weigh institutions based on their market share and number of branches.
"Under the proposal, the calculated national rate will continue to be significantly affected by the rates offered by the largest banks, given that those institutions hold a large market share, resulting in a national rate not reflective of actual competitive, market pricing," wrote Dafina Stewart, associate general counsel at the Bank Policy Institute, which represents the nation’s largest banks.
Online banks, credit unions cast shadow
The comment letters also reflected persistent concerns from banks of all sizes about the rise of fintech competitors and credit unions, whose rates aren't reflected in the FDIC’s national rate calculations.
Currently, the FDIC’s methodology for calculating rates leans on the geographic spread of a bank and its branches, rather than having a bank’s rates counted once per institution.
Certain changes to the agency's proposal, like putting rates into silos organized by product offered, would diminish the advantage enjoyed by online challenger banks in certain ways. But bankers say that the emphasis on branches and deposit market share will continue to distort rates to the advantage of online and credit union competitors.
The proposal “does not fully address the impact of internet banks and depository listing services within a local market,” wrote Jenna Burke, senior regulatory counsel for the Consumer Bankers Association. While the FDIC’s proposal to allow less than well-capitalized institutions to apply for a “local rate” of 90% of the rate paid on deposits in a given geographic area, “such a rate will be artificially low” if that geographic area doesn’t include rates offered by online banks or other nonbank competitors.
That concern was echoed by state regulators.
“The local rate cap calculation and process should factor in rates offered by internet-only banks,” wrote John Ryan, president of the Conference of State Bank Supervisors. “We encourage the FDIC to find a way to factor in the rates of internet-based institutions whose deposit footprint may have an acute effect on local market areas.”
In its proposal, the FDIC’s new calculation did not incorporate credit union rates but left the door cracked open to that approach, signaling that it “may consider evidence as to the rates offered by credit unions but only if the insured depository institution competes directly with the credit unions in the particular market."