Chris Duncan

Under Capitalized Banks and Non-Core Deposits



Posted: Friday, September 18, 2009

by
Jumbo CD Investments, Inc.

Many people don't worry about the capitalization of a bank. However, it is a good harbinger of distress and if not corrected early and quickly, many under capitalized banks fail. Under capitalized banks are able to use a rate listing service to attract certificate of deposits (CDs). As it appears that no one is policing the rate listing services, banks are able to offer rates significantly above the new Rate Cap that the FDIC has put into place. Although, the law doesn't go into effect until January 1, 2010, the FDIC has encouraged voluntary cooperation. From what I'm seeing, under capitalized banks aren't cooperating. I have a serious problem with the law that allows banks (under or well capitalized) through a rate listing service to attract deposits and classify them as a core deposit. Anybody with any sense and logic can see that clearly, deposits placed through a rate listing service are not core.

This poses a few problems. First, rate listing services and companies such as ours are basically doing the same thing. We help banks, often times community banks, raise direct deposits to meet their funding needs. For various reasons, deposits such as ours are more attractive than local deposits. Ours may be less expensive, easier to work with, faster to obtain, etc. Those reasons aren't really part of this post. If Credit Union A purchases a direct CD from me to go into Bank B, it is a brokered deposit. If Credit Union A purchases a direct CD from the rate listing service to go into Bank B, it is not a brokered deposit. It is the same money, the same bank. Everything is the same except for the middle man (or middle listing service). This leads to the second problem. Banks are now using rate listing services to avoid paying the new FDIC assessment on brokered deposits. I can't really blame the banks for doing this. After all, the law allows them to. But if the FDIC's concern is that out-of-area deposits pose more of a risk to the bank, then all out-of-area deposits should be properly supervised, managed, and assessed if appropriate.

Another problem (the meat of this post) is under capitalized banks are not allowed to take brokered deposits without a waiver from the FDIC. This is supposed to prevent unhealthy banks from running up their deposits and costing the FDIC even more money. These deposits also can cause a bank to be less valuable to potential acquirers and thus costing the FDIC money. An under capitalized bank is able to take non-core deposits from a rate listing service without a second glance. The rates they are offering are supposed to be at or below the rate cap that the FDIC has published. It appears that no one is policing this. At a minimum, rate listing services should have to build into their programs rate restrictions on under capitalized banks. Below are a couple of examples of current under capitalized banks offering high rates on a rate listing service and attracting deposits. I'm not going to publish the names because I don't really want to cause problems for the banks. Bank A is currently under capitalized with a Total Risk Based Capital Ratio (RR) of around 5.5%. This needs to be 10% to be considered well capitalized. Their capital ratio is just over 2%. Generally, regulators like to see a 7% or above. The numbers reported on the June Call report are even worse. This bank is currently accepting deposits through a rate listing service with some of the top rates in the country. The rate cap established by the FDIC is 3.00% for a 5-year CD. They were recently offering around a 3.40%. Bank B is also currently under capitalized. They have a RR of 6.9%. The capital ratio is 4.6%. These are quite low. This bank is also currently accepting deposits through a rate listing service. Their 1-year CD was around 2.00%. That is higher than many internet specials. The rate cap in place by the FDIC is 1.85%. I could give numerous other examples. However, on our site I have posted data about banks that already failed and their deposit mix. I realize my opinion probably won't be very popular with banks, especially those on the rate listing services. But, I ask you, do you want to have to compete with the high rates being offered by banks such as those listed above? I also ask you to consider what is the intent of the law when it comes to accepting such deposits. The intent of the law is that banks do their due diligence when accepting out-of-area/non-core deposits. Rate listing services currently allow banks to disregard that step.

For some concluding thoughts please visit our blog post, Rate Listing Services.

We also have information on Brokered Deposits.

For more information on our company visit www.jumbocdinvestments.com.
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