This is not a new issue, but one that has made itself known again now that rates are on the rise. Not only is the FDIC rate cap based on self-reported posted rates, it is weighted not by the number of banks that report, but by the number of branches represented in the survey. As a result, the very large TBTF banks are overrepresented in the calculation of the average.
I worked at a bank that was subject to rate caps during he financial crisis. The thing that helped save that bank and other in similar straits was the zero rate monetary policy that was put into place, and the resulting low, compressed deposit rate market. This made it possible to offer rates at or below the cap and still attract non-brokered deposits. That is not true today. Few banks would be able to attract, or possibly even retain deposits at today's rate caps. I would suggest to any bank who has not yet done so to review the rate caps on the FDIC website.
I would also suggest that bankers review their liquidity contingency plans and where possible, maximize the availability of funding from the FHLB and the Fed discount window. Insured deposits might not be available in a liquidity event if your bank should ever become "Adequately Capitalized" or worse. The recent reform making reciprocal deposits non-brokered for institutions with a 1 or 2 CAMELS rating won't be of any help if your bank suffers a downgrade.
The problem is not new, but the urgency is new given the current rate environment. The FDIC rate caps were designed to solve a 1980's problem, that of troubled financial institutions offering high CD rates to stay afloat, driving up funding cost in the local market, and increasing the cost of resolution when they eventually failed. The current structure is a solution in search of a problem, and is a problem in and of itself. The rate caps do not represent rates that would allow any bank, healthy or stressed, to attract or retain deposits.
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Dwayne Kolly
Chief Financial Officer
Business Bank of Texas, N.A.
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Original Message:
Sent: 10-08-2018 14:55
From: Mary Fowler
Subject: Liquidity and Contingency Funding hot topic
As a result of a recent joint visit from the FDIC and the ASBD, we have begun to realize that there is a serious issue of the rate cap rule (Part 337.6)being problematic, to say the least, to the health and well-being of the Deposit Insurance Fund. Of less importance to the FDIC, but of most importance to small community banks like mine, the rate cap rule is not realistic in today's rate environment. Because the national average rate is based off of banks' posted rates, and not their actual rates, we have a rate cap which is far, far under the current market rates for deposits. If a bank serves a clientele that are net borrowers and therefore must depend on outside deposits for funding, being put under the rate cap is almost a death sentence. Since the rate cap would apply to all deposits, and not just brokered deposits, even local CD's would have to be acquired at well-below-market rates in order to maintain funding.
Change is urgently needed before it's too late.
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Mary Fowler
Chief Executive Officer
The Peoples Bank
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