4000 - Advisory Opinions
Clarification of Brokered Deposit Interest Rate Restrictions
June 21, 1993
Valerie J. Best, Counsel
I am writing in response to a letter you sent to me via FAX concerning the brokered deposit statutes as implemented by the FDIC's regulations. I apologize for the delay in responding to your inquiry.
ISSUE ONE. You were primarily interested in the application of the interest rate restrictions to variable rate instruments. We recently issued a letter discussing whether or not the interest rate restrictions contained in the brokered deposit regulations prohibit adequately capitalized and/or undercapitalized institutions from offering deposit instruments paying a variable rate (or perhaps more accurately, a "contingent" rate) of interest. A copy of the letter is enclosed. In that letter we advised that the current regulations do not prohibit adequately capitalized or undercapitalized institutions from offering variable rate instruments tied to an index or event beyond the institution's control, subject to certain limitations. Please review the enclosed letter for further guidance.
The analysis you provided in your letter was very helpful to me in finally resolving this issue.
ISSUE TWO. You also asked how quickly a depository institution must lower its rates to adjust to normal market area rates. You advise that your Bank prices its retail deposits weekly. You believe that weekly pricing should suffice. I agree with your conclusion.
You also referred to the "national rate" in your letter, and I am providing the following information by way of clarification. It is my understanding that examiners refer to the "asked yields" on U.S. Treasury bills, bonds and notes of comparable maturities as published daily in the Wall Street Journal. The Treasury yields plus the margins provided for by the regulation (120% or 130% of the current yield on Treasury obligations plus 75 basis points) are then compared to the same day yields on comparable maturity deposits accepted by institutions authorized to use the national rate. Treasury yields change gradually, and the margins provided by the regulation are fairly comfortable. The offering schedule may vary, but as you noted in your letter, Treasury bills are offered each week. Treasury notes are generally offered monthly or quarterly. Consequently, I suspect that the "national rate" will change gradually. Nonetheless, as an adequately capitalized institution comes closer to the 75 basis point maximum, it should closely monitor rates to assure that they do not exceed the maximum allowable.
ISSUE THREE. I agree with your conclusion that the 60--day transition period permitted by the regulation did not authorize depository institutions to exceed the interest rate limitations imposed by the statute after the effective date of the regulation (June 16, 1992). The statute authorizes the FDIC to allow an adequately capitalized institution to accept brokered deposits. The statute does not authorize the FDIC to allow an adequately capitalized (or undercapitalized) institution to exceed the interest rate limitations imposed by the statute; the FDIC's discretion in this area was eliminated by the FDIC Improvement Act of 1991.
ISSUE FOUR. You ask how yields on non-time deposits accepted outside of a depository institution's normal market area are compared to the applicable prevailing market yield. You note that the "national rate" is linked to the current yield on "similar maturity" U.S. Treasury obligations. However, you also note that money market accounts and other non-time deposits do not have a stated maturity date.
It is my understanding that, for deposit products without a fixed maturity date, examiners refer to any period of advance notice of withdrawal associated with the product or 7 days for deposits that may be withdrawn upon demand. [Interpolations are to be made as necessary to derive a yield for a maturity comparable to the deposit product under review.]
I have included for your review some recent letters addressing the interest rate limitations in more detail. You may call me at (202) 898-3812 if you would like to discuss this issue in more detail.