MoneyRates Blog

Q: I’ve always been one to shop for the best CD rates, and compare money market accounts with savings accounts, etc. Still, I have to say I’m discouraged by today’s rates. It’s not just that they are so low, but they’ve barely moved in months. Is this it? Is sub-1% the new normal?

A: Your frustration is understandable. As you say, rates on CDs, savings accounts, and money market accounts seem stuck in a rut. Still, you should bear two things in mind before you give up on being an active consumer:

• While industry averages may not have changed over the past several months, the banking industry is incredibly diverse. With thousands of FDIC-insured banks competing for business, there are always dynamics involving individual banks even when the industry as a whole seems stagnant. In other words, the one advantage consumers have right now is that with so many choices, it still pays to shop around for the best savings accounts, money market accounts, or for the best CD rates if you don’t mind locking your money up for longer periods.
• Financial developments can lull you to sleep for a while, and then change dramatically in the blink of an eye. So, while bank rates show little change lately, they are still worth following. For example, the economy seems stuck in neutral because employment isn’t making much progress, but there are other factors in play. In a global economy, the impetus for growth might come from outside the U.S. On a more negative note, a flare-up of inflation could move bank rates. So, is sub-1% the new normal? Today’s rates are still too much of an historical outlier to believe they are here to stay.

Got a financial question about saving, investing, or banking? MoneyRates.com invites you to submit your questions to our “Ask the Expert” feature. Just go to our home page and look for the “Ask the Expert” box on the lower left.

It’s a delicate balance. Sometimes banks want to attract deposits in savings accounts, money market accounts, and CDs. Other times, those accounts can be almost a liability. According to a recent story in US Banker, now is one of the latter times, when some banks may actually shun new deposits.

No, that doesn’t mean you have to give back the toaster, or whatever incentive you may have been given to open an account, but it is yet another reason you might be seeing low savings, CD, and money market rates.

MoneyRates.com has previously described how the absence of profit opportunities for banks (due to a weak loan environment, tighter investment restrictions, and higher costs) takes away from the incentive for banks to offer higher interest rates to attract deposits. Now it seems that for some banks, those deposits are actually becoming a drag on profitability.

A couple years ago, when banks found themselves over-extended in terms of loans relative to deposits, they sought new deposits to stabilize their balance sheets. Now the ratio of loans to deposits has tipped in favor of deposits in many cases. That’s good for stability, but bad for profit margins. It represents a large capital base that cannot be fully utilized for profits in the current environment.

In finance parlance, this means some banks consider themselves currently under-leveraged. This means that those banks may want to actively discourage further deposits for the time being.

Bank accounting is an odd world, but it’s important to remember there are thousands of banks out there, each with its own unique accounting situation. Therefore, while some banks aren’t hot on the trail of deposits, it is worth looking for those that are. That is where you will find the best CD rates, money market rates, and savings account rates.

About a quarter of Americans think the economy and their personal financial situations will be worse this year than last year, according to The 2010 MetLife Study of the American Dream released July 26.

That sounds pretty grim, considering how bad the last couple of years have been.

But the results actually show significant improvement over last year when 44 percent expected conditions to worsen. Apparently most people believe the economy and their finances have finally bottomed out, and in this tough environment, that’s about as good as the news is going to get.

About 41 percent of study respondents this year believe the U.S. economy and their personal financial situations will stay the same and one-third think the economy will be better this year. Most people, though, think full recovery is still three or more years away, and many feel like they’re living close to the edge, MetLife says.

Savings Accounts Lacking

A troubling 45 percent don’t think they could take care of expenses for more than a month if they lost their jobs, and 65 percent say they could not cover expenses for three months. More than half, 55 percent, are worried about losing their jobs. Two-thirds don’t think they have an adequate safety net, including enough emergency savings, insurance and retirements savings, according to MetLife.

Financial experts advise maintaining an emergency savings account to cover at least three to six months of expenses in case of a job loss. Emergency savings should be held in liquid investments, such as savings accounts, money market accounts or CD ladders — multiple certificates of deposit with staggered maturity dates to provide regular access to cash.

Not surprisingly, a lot of people are stressed out. Almost half of respondents, 45 percent, say concerns about making ends meet are keeping them up at night, and 52 percent are feeling more job stress.

Q: Where can I find CD rates for international banks? Can U.S. citizens typically and freely open accounts at non-U.S. banks?

A: There does not appear to be a comprehensive source on CD rates for banks around the world, so your best bet would be to start with some country-by-country Internet research, tracking down rates from the web sites of individual banks.

As a U.S. citizen, you generally should be able to open an overseas account, but you will find the exact requirements for doing so will vary from country to country. There are three general cautions you should bear in mind before opening a foreign bank account:

• As long as you continue to live in the U.S., you will be responsible for paying any relevant U.S. taxes on your foreign accounts.
• Putting money in a non-dollar-denominated account will subject you to changes in exchange rates. While these can work in your favor, an adverse currency swing could quickly wipe out all the interest you might earn in a year.
• Your deposits will not benefit from the same protections that U.S. banking customers enjoy. These include both anti-fraud regulations and FDIC deposit insurance. Keep in mind that when some banks went under during the financial crisis, the FDIC was there immediately to backstop deposits that fell within the insurance limit. In most countries, you’d be unlikely to find such an effective safety net.

In short, it may be more effective to shop for the best CD rates here in the U.S. than to chase higher rates that come with a number of unknowns.

Got a financial question about saving, investing, or banking? MoneyRates.com invites you to submit your questions to our “Ask the Expert” feature. Just go to our home page and look for the “Ask the Expert” box on the lower left.

Indications from second quarter earnings releases are that banks are continuing to suffer from bad loans tied to the real estate sector. That’s bad for banks, and in this case, what’s bad for the banks is also bad for bank customers.

Money market rates, CD rates, and savings account rates continue to bump along at extremely low levels. If bank earnings continue to be sluggish, it gives banks little incentive to start boosting bank rates. More specifically, if lending continues to be a troubled business for banks, there won’t be any rush to offer higher bank rates to attract the deposits that fund new loans.

The fact that banks’ earnings woes are still being tied to the real estate slump may carry even more ominous implications than the fact that bank rates may stay low for a while. There has long been a concern in the marketplace that real estate may be in for another leg downward, especially now that homebuyer incentives have expired. If this happens, the question becomes one of how profoundly those troubles will shake the stability of the banking system.

As of yet, there has been no repeat of the systemic problems which threatened the banking industry in 2008. In fact, an optimist’s view of this earnings season could be that it is a form of progress when earnings reports are disappointing because growth is sluggish, as opposed to earnings representing severe losses. Still, it looks like it will still be a while before the banking industry can breathe a sigh of relief — and an equally long while before bank rates start heading upward.