FDIC Forcing Banks to Lower Reward Checking Account Rates

Rewards checking accounts, accounts that pay above-market interest in return for certain customer actions are coming under government scrutiny according to an article on BankDeals. Several banks have been forced by the FDIC to lower the rates they offer to rather low levels in an effort to help them recapitalize. In May, the FDIC issued a ruling that "to prevent banks that are less than well capitalized from soliciting deposits at interest rates that significantly exceed prevailing rates."

The banks mentioned in the article include Libertad Bank and The Bank of Georgia. There are undoubtedly others that are being forced to lower rates due their weakened financial condition.

Whether the government should or shouldn't be doing this is one issue and one you can debate below. In my opinion, high yield reward checking accounts are different than CDs and savings accounts and a high rate is not necessarily a sign of bank distress. Presumably, banks have done their homework and know that even though they are paying a higher rates on the deposit money, they are making it up in debit card transactions and via other benefits.

The bigger issue though is how to protect yourself so that your 4% rewards checking account isn't suddently paying under 1%. The simplest way to prevent this from happening is to open an account at a financially stable community bank or credit union. BestCashCow's list of rewards checking accounts includes a safety and soundness rating from Baeur Financial. My recommendation is that you do not deposit money in a reward checking account at a bank that has a Baeur Rating of below 3 stars.

That doesn't mean the rating won't drop in the future, but at least you know the banks is in a good position at the time you open your account.