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Deposit Rate Caps: It's Time


They penalize savers, but will help keep banks private.

In my open letter to Treasury Secretary Geithner, I suggested the government impose an interest-rate ceiling on all FDIC-insured deposits.

At the risk of inviting hate mail, I think it is time for American taxpayers to demand it.

Looking at the paper yesterday, I saw that one of the weaker local banks in my community was offering over 4% on FDIC insured deposits of less than $25,000. That's higher than the home-equity-line pricing offered by a regional bank in our area in an advertisement literally on the same page.

The problem the banking industry faces today is that -- notwithstanding near-zero federal funds rates and all the quantitative easing in the world -- deposit prices aren't moving down fast enough. And with the weakest banks in a market driving deposit pricing, they won't.

Worse, bank asset prices are moving down faster than banks can keep up with. Contrary to public perception, net interest margins aren't expanding; despite all the Federal Reserve's efforts, margins actually shrank during the fourth quarter, to their lowest level in years..

For banks, their only current choice is to raise loan pricing - currently being done by setting absolute rate floors on borrowers. This is hardly a positive for an already troubled economy.

The only way to change this scenario is for the FDIC to impose rate caps. Now, when I say cap, I don't mean an absolute rate cap, like the one imposed in the 30s, or the one that all but killed the savings-and-loan industry in the 1970s. Instead, I mean a fixed spread cap to US Treasuries, of 5 to as many as 25 basis points.

So, for example, with 90-day T-bills yielding roughly 30 basis points, CDs of the same maturity would yield 35 basis points. Ten-year CDs, on the other hand, could yield 30 basis points over the 10-year Treasury.

But no more than that - after all, both obligations represent the full faith and credit of the United States.
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