Back in the summer of 2018, we published "Deposit Diaries: FDIC Rate Caps and Hidden Liquidity Risk" outlining the flaws of the FDIC's national rate calculation and the liquidity traps inherent in the interest rate cap restrictions. Since then, liquidity has become a key focus for regulatory examinations, specifically as it relates to Contingency Funding Plans and stress testing.
- New methodology for national rate based on average deposit rates weighted by domestic deposit share vs. the current method based on an average of all domestic branches
- National rate cap would be higher of the following:
- National rate + 75 basis point
- The 95th percentile of the national rate
- Local rate cap exception would be streamlined and allowed to be 90% of the highest rate in-market for each deposit product
While not perfect, we view this proposal from the FDIC as a shift to a more 'common sense' approach in managing the interest rate cap restrictions. This proposal would provide meaningfully more latitude for deposit rates within the national rate cap by using the 95th percentile and simplifies the process by which banks calculate a local market rate cap. While this proposal does not entirely eliminate the liquidity trap posed by interest rate caps, it does go a long way in providing regulatory relief to less than well capitalized institutions and eases liquidity stress testing assumptions for well capitalized banks. Banks have a 60-day window to voice their opinions to the FDIC.