The BankDeals Blog posted an excellent article today regarding a letter sent from the American Bankers Association (ABA) to FDIC Chairmwoman Sheila Bair. The letter asks the FDIC to intervene to force Ally Bank (formerly GMAC) to lower the rates it offers on certificates of deposit and savings accounts. Why? Here are a few excerpts from the letter:

Recognizing that the Internet forces banks to compete in a national market for deposits, the FDIC recently issued a proposal to amend its rules by suggesting a bank, under restrictions for deposit growth, use a "national rate" when determing whether the bank is offerfing rates that significantly exceed the market rate. Notwithstanding the government's concen about banks using high-rates to solicit out-of-market deposits, GMAC/Ally Bank is apparantly is permitted to solicit deposits over the Internet by offering rates that are generally the highest in the nation.

The letter ends by asking the regulators to force Ally/GMAC to lower rates:

ABA believes it is completely innapropriate, and indeed risky, for GMAC/Ally Bank to be allowed by regulators to continue to pay rates well above the market. We urge you to apply the same princples that would apply to other banks in a comparable situation to GMAC/Ally.

The ABA's argument is that banks should not be allowed to collect deposits above a certain average "national rate." So what ever happened to bank competition? The statement above alludes to the FDIC's program to force impaired banks from collecting depoists at an excessive rate. But Ally bank is not part of that program, yet. The letter states that the Treasury added $13 billion in capital to the bank but much of this capital was actually used for GMAC Financing and is unrelated to the actual bank, which existed as a separate entity within the company's finance division.

Nor are high deposit rates a cause of failure. Banks fail because of a run on the bank, usually precipitated by loan losses. Or they can be closed by regulators due to capital ratios, non-performing assets, etc. Bank of America, Citi, etc. were not bailed out due to high cd and savings rates. Bad loans made by ABA companies have caused the financial crisis, not a bank that is offering depositors a good deal.

Nor should the high deposit rates offered by Ally be a source of its losses. Ally may not make as much money, but it should be able to make money. Because of the slope of the yield curve there has almost been a better time for banks to make money. They can borrow money from depositors at 2-3% and lend it out to consumers at 5-20%. I recently received a notice from Chase that my credit card rate was increasing to Prime rate plus 14.99%, which is currently 18.24%. I'm not alone.

If banks can't borrow at 3% and lend out at 18.24% and make money, they shouldn't be in business.

Savers have already been punished as banks have dropped savings and cd rates precipitiously over the last year. This occurred because of a financial crisis precipitated by these same banks. Now, they want savers to subsidize their recovery by both funding the TARP and by accepting artificially low rates while at the same increasing fees and the rates they charge on various credit products.

Let the FDIC know that you want competition in savings and cd rates. Send them an email at webmaster@fdic.gov.

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