Why Savers Love Problem Banks

FDIC Issues Rules For Less Than Well Capitalized Banks

The FDIC has an internal list of 305 Problem Banks which they do not make public.  In general, banks included on the list have series deficiencies with their finances, operations, or management that threaten their continued solvency. Once a bank is included on the list, they are subject to closer regulatory scrutiny.

In addition, the odds that a bank on the Problem Bank List will fail are much greater than for a bank not included on this list.  Since there are certain problems that a depositor may encounter when a troubled bank is closed by the FDIC, it may be wise to avoid putting deposits into a troubled bank.  It is not possible to know for certain which banks are on the Problem Bank List, but one indication of a problem bank is when the CD rates offered are far above average.

Critics have complained that allowing under capitalized banks to pay higher than average deposit rates has resulted in allowing poorly run banks to remain open longer than they should and therefore cause greater losses for the taxpayers when they are ultimately closed.  Banks that could not otherwise raise capital due to their poor financial condition can draw in huge amounts of brokered deposits by paying high interest rates.  One noteworthy feature of many failed banks is the large percentage of high rate brokered deposits to total assets.

The FDIC has been aware of the adverse impact caused by troubled banks paying above average interest rates. On May 29th, the FDIC issued final rules that restrict the interest rate that under capitalized banks can offer.

FDIC Chairman Sheila Bair stated that “The subjectivity in our current rule is allowing some weak banks to drive up costs for the rest of the industry.  Supervisors and banks need a simpler and more objective tool for achieving the statutory goal. This final rule fits the bill.”

The FDIC announced the new rule changes in it press release, as summarized below:

The Board of Directors of the Federal Deposit Insurance Corporation (FDIC) today issued a final rule changing the way the FDIC administers its statutory restrictions on the deposit interest rates paid by banks that are less than well capitalized.

The Federal Deposit Insurance Act requires the FDIC to prevent banks that are less than well capitalized from soliciting deposits at interest rates that significantly exceed prevailing rates. The FDIC’s current regulation ties permissible interest rates paid by these banks on some deposits solicited nationally to the comparable maturity Treasury yield, and ties permissible interest rates on deposits solicited locally to undefined prevailing local interest rates.

The final rule defines nationally prevailing deposit rates as a direct calculation of those national averages, as computed and published by the FDIC based on data available to it.

The rule applies only to the small minority of banks that are less than well capitalized. As of first quarter 2009, there were 248 banks that reported being less than well capitalized, out of more than 8,200 banks nationwide.

The rule is effective January 1, 2010.

According to Bankrate.com, the highest nationally available CD yield on June 6th was being offered by Corus Bank, Chicago Illinois.  Corus Bank’s management acknowledged in their latest 10-Q that “There is substantial doubt about our ability to continue as a going concern.  In its report dated April 6, 2009, our independent registered public accounting firm stated that our net losses raise substantial doubts about our ability to continue as a going concern”.   It is highly likely that the high rate CD’s being offered by Corus Bank will not be available at some point in the near future.

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