Ally Bank Bows to FDIC, Slashes Rates

by High Yield Savings Accounts

Should a well funded bank be able to set their own interest rates to attract new customers, or should they bend to the pressure from the Federal Deposit Insurance Corporation (FDIC) to lower interest rates? If you support the free market, your answer would probably be no. But that is what recently happened when the American Bankers Association (ABA) sent a formal letter of complaint on behalf of its members to the FDIC.

The complaint stated that Ally Bank was offering higher interest rates than its competitors, and that Ally Bank had plans to receive funds through the Treasury Liquidity Guarantee Program (TLGP).

The FDIC’s Temporary Liquidity Guarantee Program backs financial institutions and allows them to borrow money at near-Treasury rates in exchange for a fee. Because Ally has been approved to borrow money from the TLGP, some ABA members complained they were using the TLGP funds to attract new customers by offering higher interest rates that was reasonable in the current economic environment.

Should the FDIC control interest rates?

The government shouldn’t regulate every aspect of private industry, but the lines become less clear when there are government bailouts or even government ownership on the line. The FDIC responded to the ABA’s letter by sending a letter of their own to Ally Bank, essentially telling them to lower interest rates so long as they participate in the TLGP.

What does this mean for Ally Bank members?

Overall, not much will change except interest rates. Ally Bank accounts are still covered by the FDIC so there should be no problems with customer funds no longer being guaranteed, and there should be no other differences noted by customers. Unfortunately, it means that new customers who were lured by the promise of higher interest rates will see them fall a little bit – through no fault of Ally Bank. It’s just an unfortunate change of events from a customer perspective.


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