U.S. FDIC restricts interest rates at weak banks

[p12]

link http://uk.reuters.com/article/rbssFinancialServicesAndRealEstateNews/idUKN2941127620090529


WASHINGTON, May 29 (Reuters) - U.S. banks that are struggling to stay afloat will not be allowed to aggressively ratchet up interest rates to attract customer money, a top bank regulator said on Friday.

The Federal Deposit Insurance Corp voted to bar a bank with insured deposits from paying interest rates that "significantly exceed" prevailing market rates if the bank is deemed not well capitalized. The new rule better defines what constitutes normal market rates, the FDIC said.

The agency also finalized a rule that expands the FDIC's debt-guarantee program to include mandatory convertible debt. The FDIC passed an interim rule in February to expand the program, which is designed to boost confidence in banks.

The interest-rate rule comes as many smaller regional banks are weighed down by bad loans and credit losses. The FDIC said on Wednesday that the number of banks on its "problem list" grew 21 percent in the first quarter to 305 institutions -- the highest number since 1994.

Some of those institutions will likely be nursed back to health, but others will join the ranks of the 36 U.S. banks that have failed so far this year.

The number of seized banks has been consistently creeping upward, with 25 failed banks in 2008, and only 3 in 2007.

FDIC Chairman Sheila Bair said this week that the number of failed banks will continue to grow. (Reporting by Karey Wutkowski, editing by Gerald E. McCormick and Steve Orlofsky)

End of article

So a struggling bank is restricted from taking action that would improve their position.  Of course this is so the FDIC can come in at a later date and take over the bank.

It's one thing to take over a failed bank. But, it's a whole other ball game when your prevented from improving so you can be taken over.

[lone_gunman]

The government's power is rapidly taking over all aspects of our previous economic system.

 I guess we won't be able to buy or sell anything without government approval.

Isn't this a sign of the end of times?

[Werewolf]

What part of supply and demand doesn't the FDIC bunch understand.

Raise rates on savings, CD's, moneymarket and the banks will attract depositers. That provides them with money to loan (less the mandatory retention rate the FedReserve requires) which they can earn interest on. As long as that is greater than their expense to loan it - problem solved.

IMO the FED has lowered interest rates way, way to far for far too long in an effort to curtail the normal business cycle for political reasons.

And now they're putting a ceiling on interest rates that can be paid out! Clowns are running the FED now. Price ceilings and floors accomplish nothing good - ever.

[p12]

Werewolf

They understand it.

That's the problem.

[Standing Wolf]

What part of supply and demand doesn't the FDIC bunch understand.

I'm sure they understand it in purely abstract terms; they just don't like it. Government always finds greater need for government.

[Reifen]

I have a friend whose one of those right-wing conspiracy theorists.  New World Order, FEMA concentration camps, and all of that.  I usually laugh at all of that, but the more I see stuff like this happening, the more I begin to share his paranoia on the economic side of things.

[longeyes]

They plan to abolish risk and in its place substitute de facto slavery.

[longeyes]

The plan is to penalize savers and investors, the better to transfer their assets to America's "rightful owners."  Ask Obama who that might be.

[MicroBalrog]

I have a friend whose one of those right-wing conspiracy theorists.  New World Order, FEMA concentration camps, and all of that.  I usually laugh at all of that, but the more I see stuff like this happening, the more I begin to share his paranoia on the economic side of things.

I've always argued the conspiracists have it right - not in the concrete sense of there actually being a Web Of Conspiracy, but in the sense of knowing that there is a Man (as in, "fight The Man"), and there are social elites, and these are not our friends, no matter how much they profess themselves to be.

[AZRedhawk44]

I've always argued the conspiracists have it right - not in the concrete sense of there actually being a Web Of Conspiracy

There's no grand Web of Conspiracy... Just a big Fustercluck of Stupidity and Incompetence.

Secrets are way too hard to hide.  Occam's Razor suggests that they are simply all idiots.

[makattak]

Unfortunately, I have to raise a word of defense for the FDIC:

They are trying to avoid a repeat of the 1980's Savings and Loan crisis.

During that crisis, since the regulators would not close down failing banks (in fact would prop them up) and the market was already skewed due to the moral hazard of deposit insurance, unhealthy S&L's would offer much better interest rates for deposits than healthy banks could. As a result, the unhealthy S&L's would get deposits and the healthy S&L's would lose them. Thus, the healthy S&L's begin to fail, but the unhealthy S&L'sdid not improve. These unhealthy S&L's are now referred to as "Zombie Savings and Loans".

So, because of the government's refusal to let the market correct itself and their support of failed banks through things like deposit insurance (i.e. FDIC), investors have almost nothing to lose by putting money into a failing bank.

Since the FDIC has removed risk, they are now substituting government regulations for the natural regulation of the market.

So, no, this isn't some massive scheme of the government to control even more of the market.

It is, instead, a direct result of government interference. The original interference in the market (deposit insurance) has created a situation where it is necessary to use more interference in order to alleviate the unintended consequences of the first interference.

And of course the solution would be to stop interfering in the market at all. However, how politically viable do you think ending the FDIC would be?

[AZRedhawk44]

It is, instead, a direct result of government interference. The original interference in the market (deposit insurance) has created a situation where it is necessary to use more interference in order to alleviate the unintended consequences of the first interference.

And of course the solution would be to stop interfering in the market at all. However, how politically viable do you think ending the FDIC would be?

I hear ya.  That makes sense.

I have a tendency to chase those high interest rate savings accounts.  Compass, Citibank, E-trade.  Compass and Citi were both undercapitalized and TARP recipients... not sure about E-trade.  Regardless, all those high savings interest rates are gone now.  My money tends to get pulled when the interest rate drops to where it's no longer worth the hassle of multiple bank accounts (I never close my "root" credit union account). 

Sounds like I am rewarding FAIL when I do that.  Hmmm.

[K Frame]

Regulatory. Not politics.

[K Frame]

"What part of supply and demand doesn't the FDIC bunch understand."

Actually, they understand it very well, and they know that these banks aren't practicing supply and demand, they're perverting it.

The worry is that the bank will attract new customer money, but it still won't be adequately capitalized and the bank will fail, leaving FDIC to pick up the tab for depositors' funds, including those new depositors who came in just for the interest rate.

This isn't a new action by the FDIC, it's been done in the past and is based on experiences during the S&L failures of the 1980s.

So, before all of you get bent out of shape and start screaming about big brudder squashing the poor widdle bank, remember:

1. The vast majority of banks that are in trouble right now are in trouble because of the actions of their owners/boards of directors, not some faceless government agency seeking only to crush the spirit of free enterprise.

2. Who pays when a bank goes belly up and people have to tap into the Federal Deposit Insurance Fund... What, you don't know who pays? Why you and I pay, of course. 
.


And you know, some of you are REALLY starting to remind me of trained parrots...

Someone mentions "the gubmint" and the conditioned, no-thought-involved, reflexive response is "AWK! GUBMINT CONSPIRACY TO CRUSH US ALL! AWK!"

I have such an urge to throw crackers.

[lone_gunman]

1. The vast majority of banks that are in trouble right now are in trouble because of the actions of their owners/boards of directors, not some faceless government agency seeking only to crush the spirit of free enterprise.

That is only half true, and I assume you realize it.  Don't you think coercing banks to make loans to questionable borrowers had something to do with it?

[K Frame]

I don't think saying that the vast majority (which does not equal all) is incorrect.

Many, many banks went FAR above and beyond the loan levels mandated by the revised Community Reinvestment Act and dipped farther and farther into riskier loans.

But, why don't we make that situation even "better" by allowing those banks so affected to draw in even more money to be lost when the bank folds, right? After all, it's just more of the gubmint's money.

Let's also consider that the lion's share of subprime mortgages were made by companies not even subject to CRA strictures, and you've got something of a quandry.

[Werewolf]

1. The vast majority of banks that are in trouble right now are in trouble because of the actions of their owners/boards of directors, not some faceless government agency seeking only to crush the spirit of free enterprise.

The vast majority of banks are in trouble right now for two reasons:

1. Being forced to make loans to borrowers with questionable ability to repay.
2. The FED, in a misguided effort to eliminate the business cycle (kind'a like standing on the beach and ordering the tide not to come in), lowering interest rates to a level so low that it has become very difficult for smaller banks to cover their costs let alone make a profit. For a while last year real rates (nominal rate minus inflation rate) actually went negative.

It's all about politics. Can't be having a recession (capitalism's form of darwinism by culling out the failures). Might lose some votes if that happens.

Nope can't have that - can't have that at all.

[K Frame]

"1. Being forced to make loans to borrowers with questionable ability to repay."

Wrong.

Hyperbolistic talking head BS promoted by idiots like Rush.

Forced subprime loans made under the CRA are a SMALL fraction of the entire mess.

Tell me, how were Ninja Loans the Gubmint's fault?

How was the enormous increase in speculative lending by non-CRA mortgage lenders like Countrywide the Gubmint's fault?


This situation is FAR more complex than simply pointing a finger in the general direction of Washington and crying "THE GUBMINT DID IT! THE GUBMINT DID IT!"

And, to be honest, I'm rather shocked and ashamed that so many of you would buy into that sort of simplistic talking head-driven explanation just out of some inane need to whine and purl about how evil the Gubmint is.

[MicroBalrog]

2. Who pays when a bank goes belly up and people have to tap into the Federal Deposit Insurance Fund... What, you don't know who pays? Why you and I pay, of course.

So what you're saying is, the fact that the banks are insured by the FDIC empowers the Federal government to regulate their daily activities, least they go bankrupt and the FDIC is forced to intervene by throwing them money?

[makattak]

"1. Being forced to make loans to borrowers with questionable ability to repay."

Wrong.

Hyperbolistic talking head BS promoted by idiots like Rush.

Forced subprime loans made under the CRA are a SMALL fraction of the entire mess.

Tell me, how were Ninja Loans the Gubmint's fault?

How was the enormous increase in speculative lending by non-CRA mortgage lenders like Countrywide the Gubmint's fault?


This situation is FAR more complex than simply pointing a finger in the general direction of Washington and crying "THE GUBMINT DID IT! THE GUBMINT DID IT!"

And, to be honest, I'm rather shocked and ashamed that so many of you would buy into that sort of simplistic talking head-driven explanation just out of some inane need to whine and purl about how evil the Gubmint is.

For my part, I've blamed the government consistently for the housing bubble caused by those "NINJA" loans.

I don't think most of the blame belongs on the CRA, though. The blame falls squarely on Fannie and Freddie.

These two "quasi-public" companies were backing those questionable loans.

As a result, they removed most of the risk associated with those loans. Government interference distorted market signals.

I've said it before, and I will say it again:

The mortgage lenders and speculators willingly took on the risk associated with subprime loans, betting that if the borrowers defaulted, the government would back them up. It looks like they made a good bet.

[K Frame]

So, what are you actually for there, Microbalrog?

A bank that fails with, say, 50,000 investors and $10 billion in investments, or one that's allowed to offer ridiculous carrot rates and which ultimately fails with 100,000 investors and $25 billion in investments?

Which one of those sounds so much more wonderful?

Fact is, both scenarios suck.

But one sucks far less.


I used to think the Bush haters were a reprehensible lot for their continuous screechs of "It's Bush's Fault!" no matter what the issue. But, it's apparent that things aren't much different on this side of the fence...

[MicroBalrog]

Have I said anything bad about President Obama, the Democratic Party, or any other political party, in this thread?

No, I believe my intent is very clear. I argue (and I think Mak at least will agree) that the problem here - if one exists - is systemic, rather than related to a given party or politician. I also argue, in particular, that perhaps we should re-evaluate the role of government in the banking system entirely.

[thebaldguy]

I think the feds are worried about more little banks going under. They don't want to get stuck using the FDIC to cover more deposits as it's getting tapped out.

It's unreal how little some banks are paying for interest. For as bad as the banks need money, they're not paying you anything. Maybe it's because they can get free cash from the feds.

I saw a basic savings account rate at one bank at .05% APY. You give them $1000.00, and they give you fifty cents interest?

I find credit unions pay much better.

[mtnbkr]

FWIW, GMAC Bank (now Ally)is paying about 2.2% last time I looked and a 12 month CD is 2.8 APY.  At their peak, they were paying something like 7% on savings IIRC.

Chris

[Firethorn]

Forced subprime loans made under the CRA are a SMALL fraction of the entire mess.

Didn't take many to cause a problem.  Figure, at 5% interest, if 1 loan fails, you need 20 not to fail to simply make your capital back; to speak nothing of operating expenses, much less profit.

Before the crash, the bank could count on selling the house to at least make back the prinicpal(or most of it).  Now?  They're lucky to get a third back.

Then there's the domino effect - a few ninja loans caused everybody else to take larger loans that they were less likely to be able to afford.