Distressed banks could be stopped from raising depsoitor interest rates above a national average under new government regulations proposed Tuesday. The Federal Deposit Insurance Corp. could change the way it calculates limits on deposit interest rates for distressed banks. Struggling banks often raise such interest rates far above national levels in an attempt to attract new money. The FDIC's current limits on interest rates for institutions it defines as "less than well capitalized" are calculated using yields paid on government-issued Treasury bonds. The low Treasury rates of 2008 made such limits meaningless. The new rate would be calculated by the FDIC using an average of rates paid by banks nationwide. Last fall, 154 out of more than 8,300 banks nationally were classified as "less than well capitalized," according to the FDIC. The FDIC's regulations on interest rates would stop such banks from accepting high-rate "brokered deposits" sold by securities firms to customers outside of a bank's local area. Three banks failed in January and 25 failed in 2008, far more than in the previous five years combined, whereas only three banks failed in all of 2007.
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