On August 20, 2019, the Federal Deposit Insurance Corporation (“FDIC”) issued a notice of proposed rulemaking (“NPR”) relating to interest rate restrictions that apply to insured depository institutions (“IDIs”) that are less than “well capitalized.”1 The NPR would modify how the current national interest rate (the “National Rate”) on certain deposit accounts is calculated for less than well capitalized IDIs.
The National Rate and National Rate Cap
Pursuant to the FDIC’s brokered deposit regulations,2 IDIs that are less than well capitalized may not pay interest rates that significantly exceed the prevailing rate in the IDI’s market area or the prevailing rate in the market area from which the deposit is accepted.3 The FDIC developed the National Rate to serve as the presumed prevailing rate in any given market area. The National Rate is capped (“National Rate Cap”) based on a methodology developed by the FDIC. The NPR would amend the methodology for calculating the National Rate and National Rate Cap.
The National Rate is currently the simple average of rates paid by all IDIs and branches on a given deposit account, for which data are available, while the National Rate Cap is the National Rate plus 75 basis points.
In the adopting release accompanying the NPR, the FDIC noted that most commenters responding to its December 18, 2018 advance notice of proposed rulemaking4 thought the National Rate was too low. Some reasons cited were the disproportionate effect of the largest banks with the most branches on the National Rate and the proliferation of branchless online banking. The NPR would adjust the National Rate calculation methodology to remove the number of branches from consideration.
The NPR would define the National Rate as the weighted average of rates paid by all IDIs on a given deposit account, for which data are available, where weights are each IDI’s market share of domestic deposits. The National Rate Cap would be set to the higher of (1) the rate offered at the 95th percentile of rates paid by IDIs, for which data are available, weighted by each IDI’s share of total domestic deposits or (2) the proposed National Rate plus 75 basis points.
The FDIC would compute the permissible National Rate Cap applicable for different deposit accounts and maturities on a monthly basis and would plan to publish such information on the FDIC’s website on a monthly basis.
The Local Rate Cap
The NPR would also amend the local rate cap, simplifying the process for less than well capitalized IDIs that seek to offer a local market rate that exceeds the National Rate Cap. The NPR would allow less than well capitalized IDIs to provide evidence that any bank and credit union in its local market offers a rate on a deposit account in excess of the National Rate Cap. Upon providing sufficient evidence, the less than well capitalized IDI would be allowed to offer up to 90 percent of the competing bank or credit union’s rate on that account.
Other Observations
We are aware that regulators are reportedly referencing the National Rate Cap during examinations, even in the case of well capitalized IDIs. The FDIC has responded to these concerns by revising its Risk Management Supervision Manual of Examination Policies and clarifying to examiners that rate caps apply only to IDIs that are less than well capitalized.5
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The FDIC invites comment on the NPR. Any comments must be received within 60 days after publication of the NPR in the Federal Register.
Please call any of the following Seward & Kissel attorneys at (202) 737-8833 if you have any questions about the NPR:
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1 The NPR is available at https://www.fdic.gov/news/board/2019/2019-08-20-notice-dis-b-fr.pdf.
2 12 C.F.R. Part 337.
3 Well capitalized IDIs are not subject to the interest rate restrictions in Section 337.6. See 12 C.F.R. § 337.6.
4 FDIC Advance Notice of Proposed Rulemaking, Unsafe and Unsound Banking Practices: Brokered Deposits and Interest Rate Restrictions, 84 Fed. Reg. 2366 (Feb. 6, 2019), available at https://www.govinfo.gov/content/pkg/FR-2019-02-06/pdf/2018-28273.pdf.
5 The revised Risk Management Supervision Manual of Examination Policies is available at https://www.fdic.gov/regulations/safety/manual/section6-1.pdf.
