Wednesday, July 09, 2008

Indymac CD Yields

by Bill McBride on 7/09/2008 02:59:00 PM

From the LA Times: For opportunists, IndyMac CD yields are a bonanza

[T]he troubled Pasadena-based thrift isn’t just edging competitors on yield -- it’s trouncing them.
...
For a six-month CD with a $5,000 minimum deposit, IndyMac’s website on Tuesday was offering an annualized yield of 4.10% as an online "special."

The next-highest-paying bank in the nation for six-month CDs was Corus Bank of Chicago, with a 3.7% annualized yield, according to bankrate.com.
Most 6 month CDs are paying in the 3.0 to 3.2% range (annualized). According to Indymac, the FDIC has banned them from accepting brokered deposits, but they can still accept individual deposits:
A consequence of falling below well-capitalized is that we are no longer permitted to accept new brokered deposits or renew or roll over existing ones, unless we get a waiver from the FDIC.
This is a classic hazard of insurance - Indymac needs deposits to stay in business (there is somewhat of a run on the bank right now), and to attract deposits they have to pay a higher than industry interest rate. The FDIC is well aware of this problem:
Concerns about Moral Hazard. In the insurance context, the term "moral hazard" refers to the tendency of insured parties to take on more risk than they would if they had not been indemnified against losses. The argument is that deposit insurance reassures depositors that their money is safe and removes the incentive for depositors to critically evaluate the condition of their bank. With deposit insurance, unsound banks typically have little difficulty obtaining funds, and riskier banks can obtain funds at costs that are not commensurate with their levels of risk. Unless deposit insurance is properly priced to reflect risk, banks gain if they take on more risk because they need not pay creditors a fair risk–adjusted return. A truly risk–based assessment discourages such risky behavior. The moral hazard problem is particularly acute for insured depository institutions that are at or near insolvency but are allowed to operate freely because any losses are passed on to the insurer, whereas profits accrue to the owners. Thus problem institutions have an incentive to take excessive risks with insured deposits in the hope of returning to profitability.
emphasis added

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