The Federal Deposit Insurance Corporation is taking a look at troubled banks and it doesn’t like what it sees. One outcome? The FDIC is ordering failing banks to cap certificate of deposit rates — or else.

That stance isn’t going to help the already sluggish CD rate market. Even though the FDIC “rate cap” news was only released a few weeks ago, financial analysts are already pegging the move as a big reason why CD rates may go down further in 2010.

According to a new report from Market Rates Insight called “Deposit Rate Projection for 2010,” deposit rates are projected to decline in the first half in 2010.

Among the key reasons cited by Market Rates? High unemployment, the Fed’s policy on interest rates, a potential “wild card” in inflation — and the FDIC’s call for a rate cap on troubled banks.

The report says that the rate cap should negatively impact CD rates for the following reasons:

  • Undercapitalized banks tend to price deposits more aggressively compared to well-capitalized banks, up to the point of failure or rate restrictions by the FDIC.
  • Small and mid-size banks tend to price deposits higher than the top 19 banks (the “stress-test” banks).
  • Undercapitalized banks will find it harder to compete on rates in nine states, where the average maximum rate is higher than the FDIC rate cap.

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See a more detailed look at the Market Rates Insight report here.

The FDIC rollback on CD rate deals from troubled banks was announced on Dec. 10.

The genesis, from the point of view of the FDCI, is that troubled banks, desperate for depositors, are more inclined to offer great CD rate deals. Allowing failing banks to offer uncapped CD deals used to be just a part of doing business for the FDIC. But with 120 U.S. banks having failed in 2009 and FDIC funds dwindling, that was a luxury the agency couldn’t allow anymore.

Beginning on Jan. 1, 2010, U.S. banks that are designated by the FDIC as not sufficiently capitalized, won’t be able to sell bank CDs with an interest rate that is 0.75% above the national average (as measured by the FDIC’s own calculations). The rollback on rates also pertains to savings, money-market and interest-bearing checking accounts, as well.

So, even though the FDIC edict impacts only 552 banks, CD rate customers still won’t like it. With less incentive to compete with high CD rates, healthier banks should roll back rates, too.

All of a sudden, 2010 looks worse for CD customers than 2009 — if that’s possible.

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