Is the Fed Going to Determine Savings Account Interest Rates?
Do you still remember to what happened to Washington Mutual last year?
On September 22, 2008, WaMu surprised many people by offering one of the highest interest rates for its savings account. At 4.0% APY, the yield was very attractive and competitive. However, that didn’t last long. On September 25, WaMu was closed by the Fed and later sold to JPMorgan Chase for a fraction of what it was worth. Given the situation WaMu was in at that time and all the rumors that it was trying to sell itself but found no buyers, the bank’s decision to boost its interest rate was questionable. Now, when we looks back, it seems that the move was more like a tactic that WaMu used to attract more deposits before it failed. The question is for a bank that was in as much trouble as WaMu was, can it still offer savers the kind of interest rates WaMu offered when it knew its survival was in question?
Then early this year, the FDIC took up the issue and proposed a regulation that will prevent banks in bad financial shape from offering excessive interest rates. The proposal wants to set an upper limit on interest rates weak banks can provide to its existing and potential customers. The interest rate cap is calculated by the FDIC based on the average of interest rates paid by all insured depository institutions. Even though at that time there was no word on how high or low that average of interest rates will be, what it will do to bank savings accounts seem to be obvious: Savings account yield will be lower once the new regulation takes effect. While the target of the new rule are those banks that are less than Well Capitalized, I feel that all banks will be affected because if the bar is lowered, by the Fed, banks will all reduce their rate, whether they have enough capital or not. Just like the current cycle of rate reduction, there’s simply no reason for a bank to maintain a high rate is everybody else is paying less. As long as its rate is better than others, the bank can still attract customers from its competitors.
Last Friday, the Fed released its first national rates for savings, interest checking, money market accounts and CDs, and rate caps for those accounts. Based on the Fed’s calculation from as many as 74,000 banks and their branches, the national rate for savings account with balance less than $100K is 0.22% and the rate cap is 0.97%. For balance greater than $100K, the national rate and rate cap is also set at 0.22% and 0.97%, respectively. These rates, as you can see, are significantly lower than those currently offered by most savings accounts that I know.
The new rule won’t be effective until January 1, 2010 though.
What do you think of this new rule? Is it a good idea?
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