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Your Savings Account and "Too Big to Fail" Banks

October 12, 2009

By Andrew Freiburghouse | Money Rates Columnist

Is Your Savings Account "Too Big to Fail"?

"Too big to fail" has become a cliche, but its impact on consumer banking should not be ignored. Two years from now, banks that are considered too big to fail may operate quite differently than smaller banks or credit unions.

Your savings, checking, money market account or CD rates may be one of those differences.

Will Higher Capital Requirements Affect Interest Rates and Fees?

Theoretically, one might assume that if big banks are forced to hold higher capital positions--meaning they must have more money on deposit as security for their loans--their ability to offer high interest rates for savings accounts, CDs, and other deposit accounts would be diminished.

It's not just about interest rates. Higher capital requirements might weaken these banks' ability to offer free checking accounts, free online bill pay, and a myriad of other attractive services that cost banks a tremendous amount to build. These services have been a way for big banks to buy the business of savings account and checking account customers. In some cases, big banks have been able to offer aggressive front-end perks, such as $100 for opening a checking account or CD rates that are higher than those of smaller banks or credit unions.

But many of these front-end gifts, if too-big-to-fail legislation passes, might be viewed by banks as too detrimental to their profit margins. The cost of offering these perks might be balanced by more (and higher) fees of all sorts, from currency converts to overdraft fees and minimum balance requirements.

Exactly how too-big-to-fail legislation would affect interest rates and bank fees is really an unknown. But an effect would likely be felt somewhere, and that somewhere may be in your deposit account.

The Efficiency Factor

Mentioned above is the idea that big banks have spent a gargantuan amount of money perfecting technology systems, such as online and mobile banking systems, that require major investment. In an environment of high-performance banking--and it must be admitted that savings accounts and checking accounts have rarely been better managed than they are today--efficiency is the highest priority for banks.

Bank customers, especially savings and checking account users, enjoy the fruits of the banks' focus on efficiency, and often for free. Online banking, mobile banking, e-bills, and all the rest have really changed the account holder experience for the better in a lot of important ways. Conducting straightforward transactions such as monitoring your checking account balance has never been easier.

Will the major banks charge for these conveniences? Probably not, because software platforms built for the banking industry by third-party technology firms can put smaller banks and credit unions on nearly equal footing against bigger banks. Smaller banks, for example, can buy out-of-the-box solutions to offer online banking to their customers. This competition places some limits on how much big banks can charge customers.

Savings and Checking Customers a Valuable Asset for All Banks

Even in a world where there are two kinds of banks, too-big-to-fail banks and all the rest, both types still need deposit account customers. As a consumer with funds to deposit, you can milk this dependency by shopping around. Make banks compete by looking online for the best interest rates on savings, checking, and other deposit accounts.



Is Your Savings Account "Too Big to Fail"? • http://www.money-rates.comhttp://www.money-rates.com/blog/2009/10/is-your-savings-account-too-big-to-fail.htm


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