Personal Finance Blog By MoneyRates - December 2009
November 30, 2009
Traditionally, the Friday after Thanksgiving is one of the quietest and calmest of the year in the U.S. financial markets. Not this year. News that Dubai was looking to delay payment on $60 billion in debts rocked the stock market and sent bond yields lower.
This drama will probably play out in multiple installments, as Dubai's efforts to restructure its debt and the broader effect on the world banking system are sorted out in the days ahead. Meanwhile, for U.S. bank depositors, it is one more reminder that even the most conservative accounts can sometimes be touched by seemingly unrelated events.
How can a default in Dubai affect U.S. bank depositors? There are a few possible ways:
- With the financial system still somewhat fragile after its extreme difficulties last year, it remains to be seen whether this default could trigger another crisis. The immediate reassurances that U.S. banks have little investment in Dubai debt ring hollow. The inter-connectivity of the world's large financial institutions was made crystal clear last year.
- If the trouble in Dubai sets off another wave of global economic weakness, bank rates could slip even lower. The initial response of the bond market on Friday was to send interest rates lower, which is the classic reaction to economic weakness.
- In contrast to the reflexive reaction of bank rates heading lower, at some point another credit crisis could actually mean higher savings account rates, money market rates, and CD rates. If liquidity around the world tightens yet again, it could be argued that people with capital, like bank depositors, should be able to demand more of a reward for that precious commodity.
November 26, 2009
If you've got CDs, savings accounts, and money market accounts, you're likely concerned about the decline in the value of the U.S. dollar. It can be very frustrating to be not only receiving low interest rates on your savings, but also to be perceiving the value of the dollars in those deposit accounts declining.
Indeed, the decline in value of the U.S. dollar has been getting a ton of press lately, all of it bad, much of it bordering on hysteria. But could bad news for the dollar actually be good news for tomorrow's bank rates?
Fed Interest Rate Policy Due for a Pre-Planned Change
The main reason why a weak dollar could be good for tomorrow's bank rates pertains to the idea, obviously endorsed by Fed Chairman Ben Bernanke, that low interest rates (the prime cause of the weak dollar) are necessary for a recovery of the U.S. economy.
For example, low interest rates allow people with troubled mortgages to refinance.
The thing is, everyone knows low interest rates won't last forever. Sometime, some day, the Fed will raise interest rates--and everybody knows it. If the dollar is super-weak, the rate rise will likely be more drastic.
In the meantime, Happy Thanksgiving!
Posted in: Miscellaneous
November 25, 2009
The Quarterly Banking Profile from the Federal Deposit Insurance Corporation (FDIC) showed a dramatic de-leveraging of bank risk levels in the third quarter of 2009. This is a necessary step in curing part of what ails the banking system -- but it is a bitter pill for depositors to swallow.
In the third quarter, loan balances took their largest quarterly drop on record. This is partly because of write-offs of bad loans, and partly because of the slow volume of new loans. Meanwhile capital reserves were up sharply. The loan-to-capital ratio is a reflection of the amount of financial leverage in the banking system. Reducing loan balances and raising the capital base means less risk.
For depositors, that's good news in terms of the overall stability of banks. However, this cure does not come without a cost, and that cost is reflected in the low level of bank rates. Since banks are reluctant to lend, they are increasingly placing their capital in conservative investments. Bank balances at the Federal Reserve grew by nearly 37% during the quarter, and investments in Treasury securities increased by 49%. Since these investments are yielding virtually nothing, banks can ill afford to pay much for deposits in the form of CD rates, savings account rates, or money market rates.
Perhaps the most unqualified piece of good news is that the banking industry in aggregate found its way back to profitability in the third quarter. As the industry finds profitable uses for its capital, it will be more encouraged to pay higher bank rates to attract that capital.
November 24, 2009
For the first time since 1992, the FDIC's fund that protects bank deposits has fallen to a negative balance. A negative balance of $8.2 billion, in fact.
At the end of the second quarter, three months ago, the FDIC bank protection fund amounted to $10.4 billion.
Bad bank loans are the main culprit in the decline of the FDIC insurance fund. Banks set aside $62.5 billion in the third quarter to handle bad loans, but that may not be enough.
4.94 percent of all loans are now delinquent by at least 90 days.
However, this does not mean that the FDIC has no money. The organization still has $23 billion in cash on hand, and will receive a $45 billion infusion of capital from its plan to force banks to prepay three years of dues at once.
So far in 2009, 124 banks have failed.
Are these safe investments really all that safe?
Which is, in turn, backed by the full faith and credit of the United States government.
Posted in: Miscellaneous
November 23, 2009
Not long after introducing a bill that would have meant sweeping reforms for the banking industry, Senator Christopher Dodd has backed off in the face of opposition from both parties to the scope of his proposal. While no one has been able to get Democrats and Republicans together on what banking reforms are needed, Dodd's proposal did achieve bi-partisan consensus on what they don't want.
While Dodd originally threatened to use the Democratic majority to push his bill through, he now rather meekly has described his proposal as just a "discussion draft."
If banking regulation has slowed, it could give banks a breather they need -- and ultimately even benefit bank customers by taking some of the downward pressure of bank rates. To be sure, some reform of the banking industry is called for -- especially measures which would insulate conservative deposits like CDs, savings, and money market accounts from speculative investment activities. Still, much of this could be accomplished simply by sharper oversight from those already empowered to supervise banking activities -- including the same House and Senate committees that are now formulating regulatory measures.
The risk of layering too much complex regulation on the banks right now is that it raises the cost of doing business. This would ultimately hurt depositors in two ways. It could have a direct impact on savings account rates, money market rates, and CD rates by limiting the amounts banks could afford to offer. At the extreme, higher regulatory costs could also jeopardize the solvency of some banks.
So, there is still room for constructive legislation, but if last week's stalling of Senator Dodd's proposal is the start of a more measured approach to the issue, that would be a form of progress as well.