MONEY

FDIC limits bank-account interest

Whether you’re a dutiful saver or someone who has newly resolved to sock more cash in your emergency fund, good luck getting a decent yield from your bank. Interest rates on savings accounts and CDs are pretty dismal. (When 1.69% — the rate currently offered by Colorado Federal Savings Bank — is the best you can get on a savings account, you know things are bad.)

Now it looks like those rates are going to take another dip, thanks to a new Federal Deposit Insurance Corporation rule that went into effect on January 1.

Last May, the FDIC ruled that banks that are “less than well capitalized” would not be allowed to offer interest rates more than 75 basis points (that’s 0.75 percentage points) over a national average rate published by the agency. It’s not uncommon for a struggling bank to ratchet up interest rates on its deposit accounts as a way to attract capital. But if the bank fails, it’s the FDIC that is responsible for covering those insured deposits. With 140 banks on the failure list in 2009, it’s clear the FDIC doesn’t want to be on the hook for more than it has to be. (Another FDIC proposal on the table this week: Tie banks’ insurance premiums to their level of risky pay behavior.)

Research firm Market Rates Insight concludes that the interest-rate cap on weak banks will lower national average rates by about 12 basis points. In fact, the firm reports that the average of the top deposits rates on CDs and money-market deposit accounts has already fallen three basis points, from 2.30% to 2.27%, in the first week of January.

CrankySaver over at Bankaholic thinks this is just another punishment for savers, but I don’t believe this FDIC rule is a bad thing. It’s true that as long as you’re under the FDIC insurance limits at any one bank, your cash isn’t at risk even if the bank fails. But do you really want to go through the hassle of dealing with a failed bank? Over at this Bogleheads discussion thread, most depositors reported few problems with recent failures, while others recounted having to wait a few weeks for their dough. At MONEY, it’s our policy to steer you to banks that are not in trouble, so we avoid publishing deposit rates for banks with fewer than three stars on Bankrate.com’s Safe & Sound ratings system.

If you are looking for a better than average rate, all is not lost. Granted, the current average yield on money market deposit and savings accounts at banks with at least three stars on Bankrate.com’s ratings system is 0.23%. But you can do a lot better than that by shopping around: One four-star institution, Bank of Internet, is offering 1.65%, while another, FNBO Direct, is at 1.40%. Look for the best rates at Bankrate.com or MoneyRates.com. Just be sure to check the institution’s ratings at Safe & Sound.

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