Five banking system changes that you should know about

The US government's effort to repair the credit markets and rescue banks has generated a variety of reactions in recent weeks. (Stan Honda/AFP/Getty Images)

Basic banking rules have changed in recent weeks as regulators have moved to bolster investor confidence both in the financial system and the economy.

The changes include higher limits on deposit insurance and the government purchasing shares in banks including Bank of America Corp. and Citigroup Inc. Together, the steps already have had some effect, bringing in deposits and driving down bank lending rates, said Greg McBride, a senior financial analyst at Bankrate.com, a research firm in Florida.

"This is really hitting at the heart of consumer concerns," he said.

Higher account insurance: As part of its broader rescue package passed Oct. 3, Congress increased the amount of insurance on bank deposits to $250,000 per depositor from $100,000, at least through the end of 2009.

Individuals who want to insure higher amounts can spread the money among several institutions. The goal is to give customers more confidence about holding big amounts in a single institution.

Banks had already been reporting an inflow of money from customers looking for more safety in light of the hits their stock portfolios had taken amid sharp stock market declines, and analysts say the new rules will only continue the trend.

Business account insurance: On Oct. 14, the Federal Deposit Insurance Corp. said it would guarantee all amounts held in non-interest-bearing transaction accounts until the end of 2009. These are mainly payment-processing accounts used by businesses to fund payroll and other business functions that often exceed even the higher $250,000 limit.

As with the additional consumer insurance, the higher limits were meant to ease worries by business owners - who often keep millions of dollars in these accounts - that they could lose out in case of a bank failure.

"The overwhelming majority of banks are strong, safe, and sound," said FDIC chairwoman Sheila C. Bair, describing the business insurance change and extra backing the agency gave certain bank debt. "A lack of confidence is driving the current turmoil, and it is this lack of confidence that these guarantees are designed to address."

Government share purchases: Also on Oct. 14, regulators described plans to spend $250 billion of taxpayer money to buy equity stakes in banks themselves to bolster their capital levels.

Some economists praised the step as one likely to encourage lending to consumers and businesses, although the government did not spell out specifically how much money the banks would have to put back into the system in return for the public funds. Banks would pay 5 percent dividends on shares they sold to the government, a figure that would rise to 9 percent after five years and give the banks an incentive to pay back the shares quickly.

Nine large banks already were named as participants including State Street Corp. of Boston and Bank of America, Massachusetts' largest lender. Smaller banks were also invited to apply to sell shares to the government.

Several New England institutions said they weren't interested.

"We're comfortable with the capital we have," said Jared Shaw, spokesman for People's United Bank in Bridgeport, Conn., one of the largest New England banks. Shaw noted it already has $2.5 billion in capital on its books and could raise at most $400 million under the government's program.

Current rates: Though lending terms are driven by many factors, Bankrate.com's McBride said the various regulatory changes have already started to show up in the deals banks offer consumers.

First, the average home-equity loan was being made at 5.48 percent last week, down from 5.8 percent in early October, mainly driven by an Oct. 8 Federal Reserve decision to lower the interest rate it charges large banks by half a percentage point.

Banks also have been raising the rates they pay on certificates of deposit as a way to entice customers moving their money out of mutual funds or uninsured hedge funds. After bottoming out in April at 1.84 percent, the average six-month CD paid a yield of 2.22 percent last week.

"Banks are hungry for consumer deposits amid the credit crunch," McBride said.

Though there is little available data to support it, anecdotally, banks say their customer deposits are rising.

The local situation: The slowing economy has taken its toll on Massachusetts banks, but they seem to be faring better than banks in other states. According to FDIC data, among 148 Massachusetts institutions insured by the FDIC, the percentage of delinquent loans and leases rose to 0.67 percent as of June 30. Nationally, the percentage was 1.94. Total assets in Massachusetts banks fell to $233 billion from $234 billion a year ago.

Massachusetts banks overall are in good health, said state banking commissioner Steven L. Antonakes, and the new rules should only reinforce confidence in local institutions.

Still, his office has been getting up to five calls a day with bank solvency questions from concerned depositors since the summer, after getting hardly any for years. He attributes the spike to news reports on bank problems such as when regulators moved to close IndyMac Bancorp. in California in July.

Even though that bank did little business in Massachusetts, the attention it received led to many local questions, he said.

"With the Internet and CNBC, there's just a barrage of coverage that didn't exist before" that tends to magnify worries, he said.

Ross Kerber can be reached at kerber@globe.com.