Tuesday, January 27, 2009

FDIC: No extra return for extra risk

FDIC proposes rate caps for troubled banks

"Struggling banks would be banned from hiking interest rates above a national average under new government regulations proposed Tuesday that aim to halt such risky behavior. The Federal Deposit Insurance Corp. wants to change the way it calculates limits on deposit interest rates for banks that are having financial problems. Banks that are trying to stay afloat often raise their interest rates far above national levels in an attempt to attract new money."

If these banks don't compensate depositors for the higher risk, they will quickly go out of business. Yes, these deposits are FDIC insured so the risk is supposed to be the same as more stable banks. However, depositors still have the risk of loss of access to funds while the bank is taken over, the inconvenience of the closest bank branch being farther away, and having to redo any automatic deposits or withdrawals.

Previously, I might have opened an account with the riskier bank to collect the higher interest rate. As a result of the new law, I would definitely choose the safer bank since there is no advantage in using the riskier bank. The riskier bank is now guaranteed to go out of business as it is unable to get new deposits.