FDIC Restricts Interest Rates on Weak Banks

by Lynn B. Johnson on June 25, 2009

FDICThe Federal Deposit Insurance Corp, aka FDIC, has voted to bar shaky banks from hiking up interest rates to attract more customer money. This change is known as Section 29 and will go into effect on  January 1, 2010. Section 29 says that banks that are struggling to stay in business will only be able to offer interest rates with a top limit of 75 basis points above the national rate.  The national rate is an average of all rates paid by reporting banks.

As a result, you will be getting the best interest rates from well-capitalized banks and we should expect around 3 percent of banks to be affected by Section 29. Some higher-yield banks, such as  Ally, the institution formerly known as GMAC Bank, which has been advertising all over the place and boasts of high capitalization, will likely be able to continue offering high interest rates to its depositors.

(At this point, it is undoubtedly important to know whether your deposits are FDIC insured. You can learn this by visiting www.fdic.gov and clicking on “Deposit insurance.”)

In any case, you’ve got at least six months to garner high rates before Section 29 takes effect, although Ally’s rates have already dropped. Its online savings account rate has fallen 0.25 percent from 2.25 to 2.00 percent this past week; its 1-year CD rate has dropped from 2.80% APY to 2.30% APY; also, its very competitive 2.50% for its “no-penalty” 9-month CD has dropped to 2.15% APY.

Are these ripples from the Section 29 changes to come? Or, maybe Ally (as one example) is eradicating what seemed to be its “Grand Re-Opening” sale.

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