The business headlines yesterday and today are full of stories about a certain brokerage that is having financial trouble. Of course, articles and announcements like what I have read only serve to hurt the public. Can you say "run on the bank?"

I refuse to participate. Many a company has been destroyed needlessly by an inflammatory statement from an analyst or from a particularly harsh media article.

I'm not saying the press should be muzzled, just that I don't want to be involved and have any blood on my hands.
When someone is down I'd prefer to offer a hand than kick them in the stomach.

That's why the rest of this article is blank.

The FDIC today passed a final ruling limiting the rates that undercapitalized banks can offer on savings, certificates of deposit, and other deposit products. The ruling leaves a lot of unanswered questions, including how much of an impact will it have on adequantly capitalized institutions.

The key component of this ruling titled Final Rule for Interest Rate Restrictions on Insured Depository Institutions That Are Not Well Capitalized is that banks that are undercapitalized (exactly how this is now measured is unclear) cannot offer rates that are more than 75 basis points higher than a "national average" established by the FDIC.

The biggest change is in how this national average is calculated. In the draft rulings, it was calculated as 120% of the current yield on similiar obligation US Treasuries. In the case of deposits in which less than half were insured, the rate went up to 130% of similiar yield Treasuries. But with Treasuries at record low yields over the last year, this has severaly constrained the ability of some instititutions to fund themslves.

The new ruling redefined "national rate" to "a simple average of rates paid by insured depository institutions and branches for which data is available." This severs the connection between the national rate and US Treasuries. This market rate will then be the benchmark rate in all market areas. Based on the ruling, banks will not be able to offer rates that are more than 75 basis points above this "national average" unless they make a case of the FDIC that local rates are markedly higher than this national average.

So, is this good or bad? For now, because of the artificially low level of Treasury yields, this is probably good and will allow some banks to raise their rates. Longer term, it may be bad for savers if Treasury rates spike, as many suspect they will due to government borrowing.

The other problem has to do with Internet banks, many of which we cover on BestCashCow. As a reader mentioned in a post on the ABA and Ally Bank, it doesn't seem right to lump Internet banks and brick-and-mortar banks together. Shouldn't Internet banks be allowed a bit more flexibility since they presumably have a lower cost structure?

Lastly, it appears this ruling isn't just for undercapitalized banks. The ruling differentiates between three different types of banks:

1. Adequately capitalized that accept broker deposits.

2. Adequately capitalized that do not accept broker deposits

3. Undercapitalized banks.

All of these institutions must adhere to the rate limits set by the "national average." Why the ruling is said to only address undercapitalized institutions is unclear to me. If this is true, then the ruling is really a major change to the way banks, under or adequatly capitalized, can price their deposits. It in essence, brings everyone under the sway of a "national rate" set by the Fed.

The ruling goes into effect on January 1, 2010 but the Fed will begin to publish this new national rate starting immediately. I have a call in to the Fed for further clarification and will be following this issue as the regulation becomes clearer and begins to impact the rates you are able to receive on your hard-earned savings.

If anyone has additional insight on this issue, please post it below.

The FDIC released numbers for the third quarter of 2009 and they weren't pretty. While banks earned a bit more money, losses continued, more banks were added to the problem list, total loans declined, and the FDIC needed to tap an emergency assessment to keep from running out of cash.

Key highlights of the press release include:

• Commercial banks and savings institutions insured by the Federal Deposit Insurance Corporation (FDIC) reported aggregate net income of $2.8 billion in the third quarter of 2009, more than three times the $879 million the industry earned a year earlier.
• More than 26 percent of all insured institutions reported a net loss in the latest quarter, up slightly from nearly 25 percent a year earlier.
• Loan balances declined by the largest percentage since quarterly reporting began in 1984.
• Insured institutions charged off $50.8 billion in uncollectible loans during the quarter, up from $28.1 billion a year earlier, and noncurrent loans and leases increased by $34.7 billion during the third quarter.
• Net interest margins improved to a four-year high. This is what contributed to bank profits. Banks are able to borrow money at 0% from the Fed or 1% from depositors and loan it out for 5%. It's impossible not to make money in the environment engineered by the Fed to saved the banks.
• At the end of September, there were 552 insured institutions on the "Problem List," up from 416 on June 30. This is the largest number of "problem" institutions since December 31, 1993, when there were 575 institutions on the list. Total assets on the problem list increased to $345 billion. If we assume that in a worse case scenario all of these banks fail, and the FDIC is on the hook for 10% of the problem assets, that's an extra $35 billion the FDIC must pay out. Which brings us to the next point...
• As projected in September, the FDIC's Deposit Insurance Fund (DIF) balance – or the net worth of the fund – fell below zero for the first time since the third quarter of 1992. The fund balance of negative $8.2 billion as of September already reflects a $38.9 billion contingent loss reserve that has been set aside to cover estimated losses over the next year. Just as banks reserve for loan losses, the FDIC has to set aside reserves for anticipated closings over the next year. Combining the fund balance with this contingent loss reserve shows total DIF reserves with a positive balance of $30.7 billion.

So, there you have it. Banks are still struggling, the FDIC is fighting hard to keep up, and more bank closings are coming.