FDIC Makes Ally Bank Loan Guarantees Dependent on Deposit Rates

Caving in to the American Banker's Association, the FDIC has stipulated that the amount of loan debt it provides Ally Bank will be dependent on the deposit rates it offers. We've already seen Ally Bank lower its rates once after the ABA letter and I suspect we'll see more reductions in the future.

Caving in to the American Banker's Association, the FDIC has stipulated that the amount of loan debt it provides Ally Bank will be dependent on the deposit rates it offers.  In a form 8-K that if filed with the SEC it noted that the FDIC placed new requirements on the bank on June 4. One of the new provisions is that the FDIC is going to use the deposit rates offered by the FDIC as one measure in determining the debt it will guarantee to Ally Bank as part of the the Temporary Liquidity Guarantee Program (TLGP).   We've already seen Ally Bank lower its rates once after the ABA letter and I suspect we'll see more reductions in the future.

Below is an excerpt from the 8-K:

As indicated in the attached correspondence, requests by GMAC for further issuances of debt that is guaranteed by the FDIC pursuant to the TLGP will be administered by the FDIC according to the following plan: (1) GMAC's access to the TLGP will be phased in over time in specific increments; (2) the FDIC will inform GMAC of the amount of guaranteed debt available to be issued upon receiving a request from GMAC; and (3) the FDIC will require certain information from Ally Bank (a wholly-owned subsidiary of GMAC) to be considered in the decision made pursuant to item (2) above, which includes (a) a detailed list of Ally Bank's deposit products updated as products are added to or deleted from the list; (b) Ally Bank's ranking among the top ten deposit-rate payers and the methodology used to determine its ranking each week during any period in which TLGP debt of Ally Bank or GMAC is outstanding; and (c) the number of basis points the interest rate paid on certificate of deposit products and other deposit products exceeds the average rates for such products listed on Bankrate.com.

This is troubling in several ways.  First, it appears that the FDIC caved-in to pressure from the big banks to force another bank to lower its rates.  As I wrote before when the ABA first sent a letter to the FDIC regarding Ally:

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.

 

Second it shows how the goverment is using the the various financial stimulus packages to throw its weight around.  Debt guarantees are used to force banks to behave in a certain way, often a way that benefits the large banks and corporations and is against the interests of savers.

And a third point, if I may.  It shows that government financing is beginning to crowd out private cash and investment.  Why should banks we forced to compete for money when the government is doling it out almost free and begging banks to take it?  A bank that does try to offer a decent interest rate - Ally - is branded as reckless.

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