What is the FDIC’s Rate Cap?
The financial crisis that started in 2007 brought us the "Great Recession" and also brought us new financial regulation to ensure that another crisis never happens. One of the changes was the Federal Deposit Insurance Corporation's (FDIC) " Interest Rate Restrictions on Insured Depository Institutions That Are Not Well Capitalized."
The idea behind this rule issued by the FDIC was to limit the interest rate that less than well capitalized banks could offer on certificates of deposit, savings accounts, money market accounts and checking accounts. Back during the financial crisis, banks that were in trouble and needing to increase their reserves resorted to offering CD rates, savings account rates and money market rates that were much higher than what other banks were offering.
Here is a perfect example of this practice. On August 23, 2008, the financial blog, MonitorBankRates.com, reported on Washington Mutual Bank offering 12 and 13 month bank CD rates at a whopping 5 percent. Just a month later on September 25, 2008, the FDIC took Washington Mutual Bank into receivership. Of course the acquiring bank, JPMorgan Chase Bank, didn't honor the 5 percent CD rates, which prompted many angry investors to complain to the FDIC. At the time, most banks' CD rates for 12 month certificates of deposit were around 2.50 percent to 3.00 percent.
The FDIC calculates the rate cap by taking the national rate gathered by RateWatch and adding 75 basis points, or 0.75 percent. The current 12 month national rate is at 0.23 percent and the rate cap is at 0.98 percent. These days the best CD rates on 1 year certificates of deposit are just above that cap at 1.04 percent.
Remember the cap is for "less than well capitalized" banks, so healthy banks are able to offer higher CD rates than the cap allows. In fact, you can search and compare CD interest rates by using our rate tables. We list both national rates and regional rates so you can be sure you're finding the highest CD rates available.
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