4000 - Advisory Opinions
An Adequately Capitalized Depository Institution Without a Brokered Deposit Waiver May Not Offer Interest Rates Significantly Higher Than Prevailing Interest Rate Offered by Other Insured Depository Institutions With Same Type of Charter
January 27, 1993
Valerie J. Best, Counsel
I am writing in response to your letter concerning brokered deposits. You asked us to confirm your understanding as follows:
[A]n "adequately capitalized bank" can offer interest rates on its deposit accounts up to 75 basis points above the average rate in its market area. It is our understanding that this can be done without seeking a waiver with the exception of true "brokered deposits" obtained through a broker.
Your understanding is correct except for the following clarification. An adequately capitalized insured depository institution that does not have a waiver may not offer rates of interest that are significantly higher than the prevailing rate of interest offered by other insured depository institutions having the same type of charter. An interest rate is deemed to be "significantly higher" if it exceeds the applicable benchmark by more than 75 basis points. Please consider the following.
A depository institution and its employees are deemed to be "deposit brokers" if they offer rates of interest which are significantly higher than the prevailing rates of interest on deposits offered by other insured depository institutions having the same type of charter in such depository institution's normal market area. 12 U.S.C. 1831f(g)(3).1 However, an adequately capitalized institution may not accept funds obtained by a deposit broker unless it has a waiver from the FDIC. 12 U.S.C. 1831f(a) and (c). When these two provisions are read together, the result is that adequately capitalized institutions that do not have a waiver can never offer rates of interest that exceed, by more than 75 basis points, the prevailing rate of interest offered by other insured depository institutions having the same type of charter in such depository institution's normal market area.2
Different interest rate restrictions apply to institutions that are operating under a waiver. The relevant provision states:
(e) Restriction on interest rate paid.
Any insured depository institution which, under subsection (c) [i.e., under color of a waiver] or (d) [i.e., institutions in conservatorship] of this section accepts funds obtained, directly or indirectly, by or through a deposit broker, may not pay a rate of interest on such funds which, at the time that such funds are accepted, significantly exceeds--
(1) the rate paid on deposits of similar maturity in such institution's normal market area for deposits accepted in the institution's normal market area; or
(2) the "national rate" paid on deposits of comparable maturity for deposits accepted outside the institution's normal market area.
12 U.S.C. 1831f(e).
You will note from the above-quoted provision that institutions operating under a waiver are not required to do a charter-by-charter comparison. Rather, institutions operating under a waiver may consider both banks and savings associations when calculating the prevailing rate.3
If an institution believes that it would be to its advantage to compare its rate to the rate paid on deposits of similar maturity in the institution's normal market area, regardless of charter, (or if the institution is offering rates in the national market) then the institution may wish to apply for a waiver in order to bring itself under the broader limits imposed by 12 U.S.C. 1831f(3). However, I anticipate that the difference between rates calculated on a charter-by-charter basis and rates calculated without regard to charter, will usually be insignificant. I also note that the 75 basis point spread appears to be a comfortable margin so that the incremental gain made by obtaining a waiver may not make a significant difference.
I trust this is responsive to your inquiry. Please call me at (202) 898-3812 or write to me at the above address if you have any additional questions.
1Consistent with the statute, the definition of "deposit broker" under the FDIC's final regulation continues to include insured depository institutions and their employees which solicit funds by offering significantly higher rates of interest. 12 C.F.R. 337.6(a)(5)(iii). Go back to Text
2I did not discuss the meaning of the phrase "normal market area" in this letter since you did not ask for clarification in your letter. Go back to Text
3Although institutions with a waiver should compare their rates to those of their marketplace competitors regardless of charter, they may only compare themselves to other FDIC-insured banks and savings associations. The interest rate restrictions apply to "insured depository institutions." The term "insured depository institution" means any bank or savings association insured by the FDIC (i.e., not credit unions). 12 U.S.C. 1813(c). Go back to Text