As we have discussed earlier, the FDIC has revised the brokered deposit/interest rate restrictions to create a presumption in favor of a “national deposit rate” starting January 1, 2010. Under this new rule, financial institutions that are less than well capitalized will be barred from paying in excess of 75 basis points above the national rate unless the institution is able to persuade the FDIC that the institution’s local market rate is above the national rate. As noted earlier, we anticipate that the presumption in favor of the national rate will be difficult to overcome.

On November 3, 2009, the FDIC issued Financial Institution Letter 62-2009 and Frequently Asked Questions that provide new guidance for financial institutions that would prefer to use a prevailing rate for their local market area instead of the new national rate. As described in its publication, the FDIC envisions a two-step process for financial institutions seeking to use a local rate basis. A financial institution that believes it is operating in a market area with deposit rates that are, on average, higher than the national rates must first request and receive a determination from the FDIC that it is operating in a high-rate area; the FDIC anticipates providing additional guidance explaining how banks can seek this threshold determination later this year. However, regardless of whether a financial institution receives such a determination from the FDIC, the new national rates will apply to all deposits outside the market area.

Should the FDIC provide a “high-rate area” determination to the financial institution, the bank or thrift must then calculate the effective rates for its local market. As today’s guidance makes clear, the prevailing rate in the applicable market area is the average of rates offered by other FDIC-insured depository institutions and branches in the geographic market area in which the deposits are being solicited. This prevailing rate includes not only other competing financial institutions, but also individual branches; in other words, a financial institution must determine the effective yield paid by each branch in its market area in order to correctly calculate the prevailing rate for its local market. This average must exclude the rate offered by the subject financial institution. The FDIC noted in its guidance that when an institution is calculating its prevailing market rate, before or after January 1, 2010, it must calculate this rate using the rates of all branches within its local market area. The FAQ provide several sample calculations.

The prevailing local market rates for different deposit products are determined based on the maturity and size of the deposit. Although the FDIC does allow for separate calculations of prevailing rates for savings accounts, NOW accounts, and MMDAs for compliance purposes, the FDIC has emphasized that it will not recognize any further distinctions among specialty deposit products. As a result, a financial institution that offers a MMDA that has interest rates tied to particular balance thresholds or withdrawal patterns will need to comply with a single “plain vanilla” prevailing national rate for all MMDAs (or, if determined to be in a “high-rate area,” with the local average for all MMDAs). However, the retail value of incentives tied to new deposits – a new toaster given away upon the opening of a new savings account comes to mind – must be incorporated into the effective yield for a particular deposit product.

In addition to separating products by maturity, the FDIC will distinguish products by size; under the FDIC’s new guidance, there are “jumbo” deposits (deposits that are greater than $100,000) and “non-jumbo” deposits (deposits that are less than $100,000). In total, we believe that the FDIC will be unlikely to recognize products other than those for which it currently calculates a national rate.

For financial institutions located in market areas with many competitor branches nearby, calculating the prevailing local market rate will likely be very labor-intensive. As a result, we recommend that financial institutions, over the remainder of 2009, continue to monitor the FDIC-posted national rates that are posted weekly, and, if necessary, put into place the procedures necessary to accurately calculate prevailing local market rates for certain of their rate-sensitive deposit products.

We will provide a further update when the FDIC issues additional procedures for financial institutions seeking a high-rate area determination.