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Federal Register / Vol. 86, No. 13 / Friday, January 22, 2021 / Rules and Regulations
and branches. Additionally, institutions, including the largest banks, had been offering more deposit products with special features, such as rewards checking, higher rates on odd-term maturities, negotiated rates, and cash bonuses, that are not included in the calculation of the published national rate.
Because of these developments, the majority of the institutions subject to the interest rate caps sought determinations from the FDIC to use the local rate for deposits obtained locally as the prevailing rate during the period when the national rate cap remained relatively unchanged. The national rate cap, however, remained applicable to deposits that these institutions obtained from outside their respective normal market area, including through the internet.
Setting the national rate cap at too low of a level could prohibit less than well capitalized banks from competing for deposits and create an unintentional liquidity strain on those banks competing in national markets. For example, a national rate cap that is too low could destabilize a less than well capitalized bank that gathers deposits outside its local market area just as it is working on improving its financial condition. Preventing such institutions from being competitive for deposits, when they are most in need of predictable liquidity, can create severe funding problems. Additionally, a rate cap that is too low may be inconsistent with the statutory requirement that an insured depository institution is only prohibited from offering a rate that significantly exceeds or is significantly higher than the prevailing rate. This could unnecessarily harm the institution, especially when liquidity planning is essential for safety and soundness.

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E. Advance Notice of Proposed Rulemaking and Notice of Proposed Rulemaking On September 4, 2019, the FDIC
published in the Federal Register a notice of proposed rulemaking Interest Rate NPR,84 that proposed to amend the national rate, the national rate cap, the local market area, and the local market rate cap, as described below.85
1. National Rate To address concerns raised in response to the ANPR about the current calculation of the national rate, from which the current national rate cap is derived, the FDIC proposed to replace 84 85
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FR 46470 Sept. 4, 2019.

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the current national rate definition, which is based on the simple average of rates paid by all insured depository institutions and branches, with a definition based on a weighted average of rates paid by all insured depository institutions on a given deposit product, where the weights are institutions respective market share of domestic deposits. This change to the calculation of the national rate was intended to address comments received in response to the ANPR that expressed concern that the current national rate definition resulted in a national rate cap that is too low because the largest banks with the most branches have a disproportional effect on the national rate, and that the branch-based methodology minimized the significance of online-focused banks, which have few or no branches but tend to pay the highest rates.
2. National Rate Cap In the Interest Rate NPR, the FDIC
proposed to replace the current national rate cap, i.e., the national rate plus 75
basis points, with a proposed definition of national rate cap that is the higher of: 1 The rate offered at the 95th percentile of rates weighted by domestic deposit share; or 2 the national rate plus 75 basis points, with modifications to how the national rate is calculated, as described below.
The FDIC stated that it intended that the proposed two-prong national rate cap be effective across economic and interest rate cycles. During periods of low interest rates such as during the 2008 to 2015 period and the current, pandemic environment since March 2020, the second prong, i.e., the national rate plus 75 basis points, would likely be the governing prong of the proposed national rate cap. During more normal interest rate environments, such as between 1992 and 2008, and between 2015 and early 2020, the other prong, the 95th percentile of rates, would likely be the national rate cap. The proposal was intended to provide a more balanced and dynamic national rate cap that would ensure that less than well capitalized institutions have the flexibility to access market-rate funding, yet prevent them from offering a rate that significantly exceeds the prevailing rate for a particular product, in accordance with Section 29.86
86 In the proposal, the FDIC discussed other ways it had considered to set the national rate cap, including setting at: The higher of the current interest rate cap and the one that preceded it from 1992 to 2009, and the average of rates paid by the top payers. 84 FR 46470, 4647646477. The FDIC
also solicited comment on whether there were better options for setting a proxy for what it means to significantly exceed a prevailing market rate when rates converge. 84 FR 46470, 4649246493.

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3. Local Rate Cap Under the FDICs the current regulation, there is a presumption that the prevailing rate or effective yield in the relevant market is the national rate unless the FDIC determines, in its sole discretion based on available evidence, that the effective yield in that market differs from the national rate. If a bank believes that the posted national rates are lower than the actual prevailing rates in the banks normal market areas, then the bank may request a high rate area determination from the FDIC. In determining whether the bank is in a high rate area, the FDIC could use segmented market rate information for example, evidence by State, county or metropolitan statistical area.87 If the FDIC agrees that the bank was in a high rate area,88 the institution would be permitted to pay as much as 75 basis points above the local prevailing rate for deposits on those products solicited in its local market areas. For deposits received from outside its local market including through the internet, the institution would have to offer rates that did not exceed the national rate cap.
Also, the FDIC could allow evidence as to the rates offered by credit unions but only if the insured depository institution competed directly with the credit unions in the particular market.
In the Interest Rate NPR, the FDIC
proposed to establish a local market rate cap that is 90 percent of the highest offered rate in the institutions local market area for a specific deposit product. Specifically, the proposal would allow less than well capitalized institutions to provide evidence that any bank or credit union with a physical presence in its local market area offers a rate on a particular deposit product in excess of the national rate cap. If sufficient evidence is provided, then the less than well capitalized institution would be allowed to offer an interest rate that is 90 percent of the highest offered rate in the local market area.
The Interest Rate NPR would eliminate the current two-step process where less than well capitalized institutions request a high rate 87 12

CFR 337.6f.
procedures for seeking such a determination are set forth in FIL692009 Dec. 4, 2009. As explained in the FIL, an insured depository institution can request a high rate determination for its market areas by sending a letter to the applicable FDIC regional office. After receiving the request, the FDIC would make a determination as to whether the banks market area is a high-rate area. If the FDIC agreed that the bank was operating in a high-rate area, the bank would need to calculate and retain evidence of the prevailing rates for specific deposits in its local market area. The question and answer attachment was revised in November 1, 2011.
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