The American Bankers Association (ABA) has not been happy with Ally Bank. A few weeks ago, the organization on behalf of its member banks sent a letter to the Federal Deposit Insurance Corporation complaining about Ally’s interest rates. With Ally planning to receive bailout funds through its enrollment in the government’s Treasury Liquidity Guarantee Program (TLGP), the bank used the opportunity to offer higher interest rates on its savings, money market, and certificate of deposit accounts than its competitors.
The letter from the ABA admonished the FDIC for allowing Ally Bank, formerly GMAC Bank, to offer the highest rates or rates among the highest in the country in order to seek more deposits and grow their business. It is unfortunate that the ABA should want to see banks lower interest rates on savings products and to let FDIC force them to do so. Millions of people rely on savings interest for living, and banks should want to encourage higher rates whenever possible.
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I do see where the ABA is coming from. Regulations such as interest rate limits, if imposed, should be imposed fairly to all banks. In any other situation, the ABA would be fighting regulation and be interested in competitive practices that allow the banks to set whatever rates they feel their business can handle.
The FDIC responded to the ABA’s complaint by sending a letter to GMAC, Ally Bank’s parent company, warning the bank to “focus on reducing Ally Bank’s overall deposit costs,” where “deposit costs” is a term we would recognize better as “interest rates.” Even before GM’s bankruptcy and the rebranding of the bank from GMAC Bank to Ally Bank, the bank offered one of the highest interest rates available, but now the high rates are unacceptable to the government.
The letter also stated that the amount of guaranteed debt available to GMAC from the government will rely on disclosure of Ally’s interest rates in comparison to the other top banks, signifying that Ally Bank should not find itself at the top of the list. SmartyPig, on the other hand, offers a significantly higher interest rate, though there are some strange restrictions when you compare the account with a traditional bank account.
So where does that leave customers?
- It would be nice to be able to find a liquid savings option that pays consistently high interest rates.
- The American Bankers Association should continue to focus on the needs of banks but shouldn’t try to stifle competition.
- Customers of Ally Bank, lured by higher interest rates, will see some of those benefits disappear.
Should the FDIC continue going after banks, even if they are well-capitalized like Ally Bank and its parent GMAC, to prevent them from offering high interest rates to attract customers? Who benefits if the ABA and the FDIC win the fight against high interest rates?
Here are links to the letters mentioned above.
Letter from American Bankers Association to Sheila Bair, chairman of the Federal Deposit Insurance Corporation, May 27, 2009
Letter from Federal Deposit Insurance Corporation to Alvaro de Molina, CEO of GMAC, June 4, 2009
Updated September 24, 2015 and originally published June 16, 2009.