FDIC Insurance Hike Could Put More Downward Pressure on CD Rates
April 15, 2009
| MoneyRates.com Senior Financial Analyst, CFA
In many ways, it is difficult to imagine CD rates, along with interest rates on money market and savings accounts, getting much lower. Historical precedent, the unusually soft inflation environment, and Federal Reserve intervention all suggest that today's low interest rates are an extraordinary, and therefore temporary, state of affairs. However, there is at least one factor that could place still more downward pressure on CD rates and other bank interest rates.
The X-factor here is FDIC insurance rates -- the insurance premiums banks have to pay in order to have their customer deposits covered by the FDIC. Because of the cost of bank failures so far, these premiums are slated to increase by at least 300% in 2009.
How will banks afford this? You'll be sorry you asked.
Like any other businesses, banks will attempt to pass rising costs along to their customers. That means banks will have to take a little something off the top of the interest rates they offer depositors.
The big picture is that this is just one reminder -- and there will be many more -- that government safety nets, while comforting, are not cost-free.
On a more specific level, it's another reason why savers should shop diligently for CD rates and the best deals on money market and savings accounts. The FDIC insurance hike will affect different banks in different ways, so people will need to pick and choose to minimize this latest squeeze on interest rates.
Richard Barrington
13 July 2009 at 4:53 am
Regarding brokerages and credit unions, keep in mind that these accounts are not FDIC insured. They may have other forms of insurance, but it's important to check out what coverage applies, and what the dollar limit is.
Jumbo CD Investments
20 April 2009 at 12:51 pm
And two other factors will come into play. One the longer the Fed holds funds funds at 0%, the further rates will slide. Currently the spread between Fed Funds and CD rates is near an all time high. Secondly, depending on the mix of deposits that a bank has, they may be charged a premium for their brokered deposits. In order to remain competitive with other banks not being charged the premium, they may lower the rates on their core deposits.
s2kreno
17 April 2009 at 2:43 pm
Well then, they'll be competing with brokerages and credit unions. Did those experience the same magnitude of losses / increased premiums?
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15 April 2009 at 6:17 pm
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15 April 2009 at 6:16 am
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