This article was last updated on November 14
The Federal Deposit Insurance Corp (FDIC), the agency that guarantees bank deposits, is expected to ease rules restricting relatively weak banks and thrifts from paying higher rates to attract deposits. Under current rules, institutions rated below “well-capitalized” are restricted from paying rates much higher than U.S. Treasury bond yields. But that benchmark is abnormally low right now as investors flock to the relative safety of government securities, so the FDIC is weighing whether to shift the benchmark to a simple average of deposit rates paid by all insured institutions.
As more banks slip below “well-capitalized,” the change could have a widespread effect, pushing savings rates far above treasury yields as banks scramble to attract depositors. Many investors are sitting on large sums of cash in existing high yield accounts, CD’s, money market funds or bonds – so this move could be a boon for them compared to the dismal returns currently on offer in stock markets.
A Word of Warning
Higher rates will be great for savers, but remember that it is the less secure or under capitalized banks that are likely to offer the higher yields in order to attract deposits. So, before you move your money from the relative safety of a HSBC or ING, make sure you read the fine print and have some comfort over the long term viability of the institution. Also, never put more that the FDIC insured limit into any one account. Like any investment, if the returns look too good to be true, they probably are!