As we’ve previously discussed, the FDIC has revised the brokered deposit/interest rate restrictions to create a presumption in favor of a “national deposit interest rate” starting January 1, 2009.  Less than well-capitalized institutions will be then barred from paying in excess of 75 basis above the national rate, unless the institution is successful in convincing the FDIC that the institution’s local deposit rate market is above the national rate.

We have had several conversations with FDIC staff over the last few weeks regarding the FDIC’s intentions with respect to the new national deposit rate structure and how FDIC in Atlanta would approach it, given that the apparent average rate in Atlanta is already higher than 75 basis points more than the national rate.  FDIC staff stated that this was a very difficult and very sensitive issue, and that the local office of FDIC anticipated that most banks would, and would be permitted to, use a local rate basis.  That was the good news.

The bad news is that the burden of proof is going to become very high for any bank attempting to demonstrate the local rates.  The FDIC has subscribed to a service called “RateWatch” that they were going to use, he believed, as a reference point.  The  FDIC will analyze carefully the definition of the local market and the computation of the average from that market.  We understand that the analysis will have to be done on a branch by branch basis within the chosen market area (using newspaper quotes is apparently not enough).

Banks seeking to support a higher local rate would need to define its “local market” — i.e., counties in which the bank has branches, or perhaps another standard that the bank can support — and then calculate the local rate paid by each bank and branch in its local market.  For this purpose, each branch is given the same weight as a single-office bank; for example, if Bank of America has 5 branches in your market, the rate paid by each of those branches is counted individually and weighted equally.  This will likely cause the large national retail banks to have a significant and disproportionate influence on local rates, especially if they are not competing for the same local deposits sought by community banks.

The FDIC acknowledges that this is disadvantageous to troubled banks seeking to pay higher rates, and that it will be difficult to get all the data and compute the permissible rate.

We also discussed with the FDIC that banks are generally willing to pay rates in excess of their posted rates.  We believe, however, that the FDIC will rely solely on posted rates.  We understand that staff in Washington had reacted very strongly against both allowing a local rate and the proposal to extend deposit insurance on demand deposits for an additional 6-month period.  This is not new news, but it does confirm our earlier understandings.