The Federal Deposit Insurance Corporation is taking a look at troubled banks and it doesn’t like what it sees. One outcome? The FDIC is ordering failing banks to cap certificate of deposit rates — or else.
That stance isn’t going to help the already sluggish CD rate market. Even though the FDIC “rate cap” news was only released a few weeks ago, financial analysts are already pegging the move as a big reason why CD rates may go down further in 2010.
According to a new report from Market Rates Insight called “Deposit Rate Projection for 2010,” deposit rates are projected to decline in the first half in 2010.
Among the key reasons cited by Market Rates? High unemployment, the Fed’s policy on interest rates, a potential “wild card” in inflation — and the FDIC’s call for a rate cap on troubled banks.
The report says that the rate cap should negatively impact CD rates for the following reasons:
- Undercapitalized banks tend to price deposits more aggressively compared to well-capitalized banks, up to the point of failure or rate restrictions by the FDIC.
- Small and mid-size banks tend to price deposits higher than the top 19 banks (the “stress-test” banks).
- Undercapitalized banks will find it harder to compete on rates in nine states, where the average maximum rate is higher than the FDIC rate cap.
The FDIC rollback on CD rate deals from troubled banks was announced on Dec. 10.