FDIC regulations impose deposit interest rate restrictions on insured financial institutions that are less than well capitalized. Such restrictions have been in place since 1992 and were designed to prevent a less than well capitalized institution from offering deposit rates that significantly exceed the prevailing rates in its normal market area. On Dec. 15, 2020, the FDIC issued a final rule that amends its methodology for calculating interest rate limits. As of April 1, 2021, the agency uses different approaches to determine the National Rate, the National Rate Cap and the Local Market Rate Cap, which the FDIC uses to ensure that an institution offers interest rates appropriate for its capitalization status.

National Rate

Historically, the National Rate was calculated as a simple average of rates paid by all depository institutions and branches that offer and publish rates for specific products. Under the new regulation, the FDIC defines the National Rate as the weighted average of rates paid by all IDIs and credit unions on a given deposit product (for which data are available), based on each institution’s market share of domestic deposits, not its number of branches, as was previously the case.

National Rate Cap

A less than well capitalized bank may not offer a deposit rate higher than the National Rate Cap for deposits of similar size and maturity. In its new regulation, the FDIC offers two options for determining the National Rate Cap. These options were configured to ensure that less than well capitalized institutions can compete for deposits in both high-rate and rising-rate environments, as well as in low-rate or falling-rate environments. As of April 1, 2021, the National Rate Cap is defined as the higher of:

• the National Rate plus 75 basis points; or 
• 120% of the current yield on similar maturity U.S. Treasury obligations plus 75 basis points or, in the case of any non-maturity deposits, the fed funds rate plus 75 basis points. 

Local Market Rate Cap

When generating deposits in its local market, a less than well capitalized bank may establish its interest rate offer using the Local Market Rate Cap, which is now equal to 90% of the highest rate offered on a particular deposit product by an insured depository institution or credit union in the institution’s geographic local market area.

An institution utilizing the Local Market Rate Cap will be required to notify its FDIC regional director that it intends to offer a rate that exceeds the National Rate Cap. This notification must be supported by evidence that another financial institution in its local market area is offering a rate on a particular deposit product in excess of the National Rate Cap. The specified local market may include the state, county or metropolitan statistical area in which the insured depository institution accepts or solicits deposits.

Rates for Odd Terms

Standard maturity terms include: one month, three months, six months, 12 months, 24 months, 36 months, 48 months and 60 months. All other term periods are considered “off tenor” for the purpose of this regulation. If a bank offers a deposit with an off-tenor maturity for which the FDIC does not publish a National Rate Cap, and if the off-tenor maturity term is not being offered by another institution within the bank’s local market area, the bank must use the rate provided in the next lower standard maturity term for that product when determining its applicable national or local rate cap. For example, an institution seeking to offer a 26-month certificate of deposit must use the rate provided for a 24-month certificate of deposit to determine the institution’s applicable national or local rate cap.