Personal Finance Blog By MoneyRates - April 2010
April 30, 2010
The obvious answer to the above headline, if you're a savings investor, is: big banks are good for giving savings investors extremely low interest rates on savings accounts, CDs, and money market accounts.
But there's a larger, less flippant question here about the large banks, those being Wells Fargo, Bank of America, Chase, and Citigroup. This bigger question is whether banks have some business need to be as big as they are, or whether our financial system would benefit from more competition.
Surely it's hard to argue that four banks holding 40 percent of total deposits is good for bank rates. Would you pay high interest rates on savings accounts, CDs, and money market accounts if your customers were coming to you in droves while you're paying them low interest rates?
Nevertheless, Bank of America CEO Bryan Moynihan and JP Morgan Chase CEO Jamie Dimon have both been making the public case that big banks are good for business and America. Their logic:
-- Big banks can make big loans
-- Big banks keep America competitive globally, helping businesses expand into foreign markets (Citigroup has been really playing up this angle)
-- Big banks can "innovate" new financial products (Bank of America's mortgage department, formerly known as Countrywide, has begun to wade back into doing non-standard mortgages)
What do you think? Granted they're no good for high deposit rates, but overall, do the big banks have a reason to exist?
April 28, 2010
According to a recent CNBC report, banks bought $5.7 billion worth of securities at new Treasury bond auctions in the month of March. At the same time, bank credit and lending activity dropped for the month. This suggests that something went wrong with the idea that low interest rates would provide economic stimulus.
In theory, low interest rates should encourage borrowing by making capital less expensive. With low interest rates, consumers are more willing to borrow to buy goods and houses, and business are more willing to invest in expansion and upgrades. This activity, in turn, would strengthen the economy.
However, all this is predicated on banks being willing to lend. If credit is actually tightening, and banks are putting their money safely into Treasury bonds instead, the theory breaks down.
Of course, the banks can profit under the current scenario, because of the spread between Treasury rates and bank rates. With savings account rates, money market rates, and short-term CD rates all averaging under 1%, banks can obtain capital for next to nothing, and then invest it in 10-year Treasuries at yields around 3.75%. That creates a nice, easy profit.
What it doesn't create is short-term economic stimulus. Maybe it's good in the long run to strengthen the banks. Perhaps not coincidentally, this pattern is also creating demand in the Treasury bond market, which helps support the government's debt habit. So it's a win-win -- just don't count depositors as one of those winners.
This is yet another reason to shop actively for higher rates. Banks that are aggressively seeking depositors seem bent on doing more with that capital than just investing it in Treasuries.
April 26, 2010
The SEC's charges against Goldman Sachs have focused attention -- from Congress, the media, and the public -- on the role that firm's executives played in precipitating the financial crisis. This is not to defend Goldman, but it is important to remember that a crisis of the magnitude we experienced in 2008 was not simply the handiwork of one firm.
It's convenient, and maybe even a little satisfying, to point the finger at a small group of arrogant bankers as the villains of the crisis -- especially when some of the finger-pointers may want to direct attention away from themselves.
After all, doesn't the SEC have a lot to answer for in this mess, along with their counterparts at the Federal Reserve and Treasury?
Also, what about the banking and finance oversight committees in Congress. They seem to enjoy holding hearings now -- where was their scrutiny three years ago?
What about the legions of mortgage brokers providing loans they knew were bad risks?
Don't forget about many of the people who signed up for those loans. While some may have been victims of bad luck as the economy worsened, too many borrowers simply believed what they wanted to hear when offered loans that required little or no front-end commitment.
The media should not get off scot-free. With programs about flipping houses for instant real estate gains, they were largely uncritical cheerleaders for the real estate boom.
So here we are in the Spring of 2010, with savings account rates, money market rates, and CD rates still at microscopic levels, as the Fed uses low rates to give the economy and the banks a financial boost. If you are suffering because of low bank rates, it's OK to blame Goldman -- just don't think they were the only ones to blame.
April 22, 2010
Derivatives are contracts that are meant to help banks and other financially interested parties mitigate risk, and make money. The classic derivatives contract is when an airline--or a bank that makes lots of loans to airlines--buys a derivative that pays off if oil prices go lower the day after you buy your supply for the next six months.
The new financial reform bill being proposed by Senator Christopher Dodd includes talk of restricting bank use of derivatives, as it should--there can be no doubt that bank foolishness with contracts has been a plague upon the land.
However, savings investors who are concerned about CD rates and savings accounts may not want to cheer too loudly if severe restrictions are placed upon bank use of derivatives. In a global financial system where everything connects to everything else, derivatives can serve as a net underneath the tightrope in certain situations.
If oil prices go up, if gold prices go down, if Goldman Sachs gets sued and that leads to other, more widespread charges against banks--well, suffice it to say that derivative contracts can allow banks to soften the blow of unfavorable events such as these (and a million others).
In that respect, when properly used, banks can use derivatives to actually protect bank deposits from danger.
April 21, 2010
During the past week, MoneyRates.com released research estimating that American bank depositors have lost $140 billion in purchasing power to inflation over the course of the last twelve months. The reason is that bank rates have been persistently below the level of inflation during that time.
The low level of bank rates remains striking. According to the FDIC, as of this past Monday average U.S. savings account rates stood at 0.20%, money market rates stood at 0.31%, and 1-year CD rates stood at 0.78%.
These numbers are low on an absolute basis, and low relative to the rate of inflation. However, perhaps what is most striking about these national averages is how much better people could do with some simple shopping around.
Right now, MoneyRates.com features a number of savings account rates of 2% or more. That's 1.8% above the national average. There are also money market rates of 2% or more, which is 1.69% higher than the national average. The best 1-year CD rates on MoneyRates.com are around 1.80%, or 1.02% higher than the national average.
Averaging those three figures -- the amounts you could gain on savings account rates, money market rates, and CD rates by shopping on MoneyRates.com -- gives you a potential boost in bank rates of 1.5%.
Now let's play what if. What if Americans hadn't settled for the average rates of the past year, but instead had flocked to the highest-yielding bank products. The average rate might have been some 1.5% higher. On the $7.56 trillion in U.S. deposits, this would have meant over $113 billion in additional interest. Instead of $140 billion in lost purchasing power over the past year, the figure would have been more like $27 billion.
So, don't let anyone ever tell you that shopping for bank rates is a waste of time. The numbers really do add up.