Q: How is the prevailing rate calculated for a local market area?
A: As stated above, the national rate should be used to determine conformance with the interest rate restrictions unless the bank has requested and received a determination from the FDIC that it is operating in a high-rate area. The prevailing rate (effective yield) in a particular market area is the average of rates offered by other FDIC-insured depository institutions and branches in the geographic market area in which the deposits are being solicited. Rates offered by credit unions can be included in this calculation if an institution can support that it is competing directly with the credit unions for deposits.
Using a local market approach, the prevailing rate is calculated based on the maturity and size of the deposit as described below.
Maturity: For accounts with a maturity, calculate the prevailing rate by averaging competitors’ rates based on the deposit term. For example, the bank’s one-year certificate of deposit (CD) should be compared against the average rate for its competitors’ one-year CDs. Separate rates may be calculated for savings accounts, NOW accounts and money market deposit accounts (MMDAs). However, further account bifurcation (for example, separate calculations for special-feature NOW accounts) is not consistent with the regulations and is therefore not allowed.
Size: For deposits of like maturity, calculate the prevailing rates for deposits under $100,000 (non-jumbo) and over $100,000 (jumbo).
For example, a bank’s market area has seven other banks and branches offering these rates for a one-year CD under $100,000:
Bank A 1.15%
Branch of Bank A 1.15%
Your Bank 1.35%
Bank B 1.50%
Bank C 1.55%
Bank D 1.20%
Bank E 1.25%
Branch of Bank E 1.30%
The effective yield on a one-year CD for the subject bank’s market area is:
(1.15 + 1.15 + 1.50 + 1.55 + 1.20 + 1.25 + 1.30)/7 = 1.30%
Note: The average excludes the rate offered by the subject bank.
In this case, the maximum allowable rate, or rate cap, for the market area is:
1.30% + 0.75% = 2.05%