Higher Savings Rates Boost Bank Health

Government officials were cautiously optimistic about the implications of an announcement this week that 10 major banks would be paying back the emergency TARP funds they received during the banking crisis. The caution stemmed from the recognition that not all the problems banks face have been solved, while the optimism was a natural reaction to the fact that at least the situation has stabilized.

Ironically, in some ways the general economic turmoil has helped the banks. Savings rates have increased as consumers have reined in their spending habits, and people have fled riskier assets for the safety of insured bank accounts. As a result, deposits in commercial banks rose by half a trillion dollars in the year ending April, 2009.

All of this is a reminder of two key things depositors should remember:

• The banking system has a great deal of support. The government has taken extraordinary steps to backstop the system, and the return of some TARP money helps the government reload the resources it has at its disposal.
• Conditions vary greatly from bank-to-bank. Just as some banks were able to pay back TARP money before others, some banks are in a more aggressive mode than others when it comes to attracting new customers. For smart shoppers, this can mean higher interest rates by actively shopping around for savings accounts, certificates of deposit, and other bank offerings.

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