Agency moves forward on interest rate cap proposal, promising ‘more balanced, dynamic’ approach

A “more balanced, reflective, and dynamic national rate cap” would be installed for less-than-well-capitalized financial institutions, the federal insurer of bank deposits said, under a proposal issued Tuesday.

The Federal Deposit Insurance Corp. (FDIC) Board unanimously issued the proposal for a 60-day comment period during its meeting. The proposal would amend the methodology for calculating the national rate and rate cap for specific deposit products.

The FDIC said the national rate would be the weighted average of rates offered on a given deposit product by all reporting institutions weighted by domestic deposit share. The national rate cap would be set at the higher of either the 95th percentile of rates paid by insured depository institutions weighted by each institution’s share of total domestic deposits, or the proposed national rate (i.e., the weighted average) plus 75 basis points.

The proposal would also allow less-than-well-capitalized institutions to offer up to 90% of the highest rate paid on a particular deposit product in the institution’s local market area. The FDIC said that provision would “greatly simplify the current local rate cap calculation and process.”

The statutory interest rate restrictions generally limit a less-than-well-capitalized institution from offering rates on deposits that significantly exceed the prevailing rates in its normal market area, the FDIC said. The agency noted that the approach proposed and issued for comment Tuesday “would provide more balance, compared to the current methodology, in that it provides less than well capitalized institutions additional flexibility to compete for funds in different interest rate environments, and yet continues to satisfy the statutory restrictions.”

The FDIC issued an advance notice of proposed rulemaking (ANPR) in February on brokered deposits and interest rate caps. The agency said it received nearly 60 comments from individuals, banking organizations, and trade groups on than ANPR.

Notice of Proposed Rulemaking on Interest Rate Restrictions Applicable to Less Than Well Capitalized Banks