FDIC wants new ceiling on yields paid by weak banks

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Savers have long been able to take advantage of the above-average yields that weak banks pay to attract money. But those days may soon be over.

The Federal Deposit Insurance Corp. today proposed new limits on deposit rates paid by banks that have less-than-adequate capital.

The agency would throw out its current complicated formulas for determining ‘permissible’ maximum interest rates on deposits at weak banks, and replace them with a relatively simple formula: The new cap would be 0.75 of a percentage point over national average yields.

‘The idea is to prevent these banks from acting in a way to compound losses to the FDIC,’ Chairman Sheila Bair said at the agency’s board meeting in Washington, according to Bloomberg News.

If the rules were in place today, the FDIC said, a weak bank would be limited to paying 2.3% on a six-month certificate of deposit. That would be 0.75 of a point above the national average yield of 1.55%, according to FDIC data.

Faced with mounting lender failures, the FDIC is trying to limit its losses when it takes control of banks and honors its insurance commitment to savers. The agency insures up to $250,000 per account, a limit that was raised from $100,000 last year.

Just before Pasadena-based IndyMac Bank failed in July, it was offering the highest yields in the nation on six-month and one-year certificates of deposit. IndyMac’s six-month CD yield was 4.10%, compared with a national average of 2.23% at the time.

The FDIC had 154 banks on its list of under-capitalized institutions as of Sept. 30, out of a total of 8,300. The agency doesn’t disclose the names of the weak banks.

The FDIC will take comments on its proposed changes for 60 days.

-- Tom Petruno