When Banks Retain Depositors by Cutting Rates

After Citibank confirmed to me that it was reducing the interest rates on its checking accounts to qualify for unlimited FDIC insurance, it's now put out a big email to that effect -- without quite coming out and saying so:

Dear FELIX SALMON,
We previously communicated that through December 31, 2009 all of your non-interest and interest bearing checking deposit account balances are fully guaranteed by the FDIC for the entire amount in your account.
We wanted to send a clarification as to why your interest bearing checking accounts at Citibank are and will continue to be covered to an unlimited extent through December 31, 2009. Citibank interest checking accounts are classified as Negotiable Order of Withdrawal (NOW) accounts and will pay an interest rate within the guidelines set by the FDIC through December 31, 2009. These features qualify your Citibank Interest Checking Accounts for current and continuing coverage with unlimited insurance under the Transaction Account Guarantee Program.

"An interest rate within the guidelines set by the FDIC" means that none of these accounts will pay more than 0.50% interest at any point in 2009.

Clearly, Citibank has determined that it will lose fewer deposits if it slashes the interest rates on its current accounts than it will if it leaves deposits over $250,000 uninsured. I think that's a reasonable determination, especially since anybody who wants a higher interest rate can just move their cash into a savings or money-market account. But it does say something that Citibank is protecting itself against bank runs.

It will also be interesting to see in Citi's next report what's happened to its foreign deposit base. Some of that is insured by foreign governments; most of it isn't. An erosion of that deposit base would not be fatal, given Citi's access to unlimited Fed funding at very low rates. But it would certainly not be pleasant.

P.S. If I was responsible for this latest round of Citispam, I hereby apologize. I only asked Citi if there was something on their website I could link to; I didn't ask them to spam all their customers!