FDIC Adopts Interest Rate Limits for Weak Lenders

The top financial regulatory agency Wednesday clamped down on interest rates that weak banks and thrifts can offer on some certificates of deposits--the first return to rate regulation in banking in a decade.

But the new limits adopted by the Federal Deposit Insurance Corp. still give most banks plenty of leeway, and banking officials said the action will have little effect on most customers.

More importantly for banks, the FDIC’s action gave the industry a clue to the shape of bank regulation in the 1990s.

The graduated interest rate cap will vary with prevailing market rates.

For instance, a weak bank selling an insured six-month certificate of deposit to a retail customer could offer no more than a 4.95% return at today’s rates--that’s 1.24% above the current Treasury bill rate.

Uninsured wholesale deposits could earn a little more--5.32%.

The FDIC, in adopting the interest rate limit for certain deposits, had to define for the first time which banks it considers weak, or only “adequately capitalized,” as opposed to strong, well-capitalized banks.

Under the new FDIC rules, only the strongest banks and thrifts will be able to accept deposits made through brokers without getting permission from the FDIC.

Institutions that are merely adequately capitalized will have to apply for a waiver before they can accept brokered deposits, according to rules that take effect June 16.

Well-capitalized banks and thrifts can continue soliciting brokered deposits, which usually earn above-market interest rates, without limitation.

The distinction between banks that are weak and those that are strong is a cornerstone of the sweeping 1991 bank reform act, which toughened the bank regulatory structure in an attempt to prevent a repeat of the savings and loan disaster.

The FDIC said adequately capitalized banks must meet minimum capital requirements. About one-quarter of the industry, or 3,000 banks, meet this standard but fail to qualify as strong banks.