Are Some Bank CD Rates Risky?

Believe it or not there is a fight brewing over CD Rates. The American Bankers Association’s (ABA) President & CEO, Edward Yingling, sent a letter to the FDIC’s Chairwoman, Sheila Bair, basically saying the FDIC needs to do it’s job and stop Ally Bank (formally GMAC Bank) from offering some of the highest CD rates in the nation. Bank CD rates which are more than double the national average for some CD deposits

Why should this bother the ABA? Their contention is Ally Bank is a troubled bank that is using a strategy of aggressively growing deposit funds to grow its way out of problems. When this strategy was used in the past by troubled banks, like in the 1980′s, deposit interest rates were driven up because healthy banks had to competitive with rates to entice and keep depositors. This strategy was known as the “Texas Premium” because most of the troubled banks resided in the Southwest.

Ally Bank’s chief executive officer, Alvaro de Molina, fired back at the ABA saying “Ally Bank has capital well in excess of Federal Deposit Insurance Corp. requirements and is better capitalized than many of your members”.

He also said “Ally is deploying TARP money as immediately and directly to support American small businesses and consumers in these difficult times, as other banks should be doing. These loans will be funded, in part, by deposits which offer an attractive return for consumers that have money to invest.”

If Ally Bank is well capitalized and it sounds like they are if the bank has more funds than required by the FDIC, why can’t they offer the best CD rates around? Let’s see how this plays out and if the FDIC actually tells Ally Bank to lower their certificate of deposit rates.