Peak in consumer bankruptcies means a valley for bank interest rates
January 05, 2011
Savings account rates, money market rates, and CD rates began 2011 where they spent much of 2010--barely above zero. While the stock market began the new year with optimism, a report on consumer bankruptcies added an extra chill to the cold winter air, and this chill might keep those bank interest rates frozen for a while longer.
Though the recession technically ended in 2009, bankruptcies continued to rise in 2010. According to the American Bankruptcy Institute, consumer bankruptcy petitions were up 9 percent last year, rising from 1.41 million to 1.53 million. This may not bode well for continued growth in consumer spending, much less the revival of borrowing activity that would put some life into bank deposit rates.
Bankruptcies and the chill on deposit accounts
What's the connection between bankruptcies and the rates banks pay on savings accounts and money market accounts? Another way to think of the question is: if you have been a conscientious saver, how does a rise in bankruptcies affect you?
Unfortunately, there is a link between consumer bankruptcies and the rock-bottom interest rates banks have been offering. Your deposits are most valuable to a bank when they can take them and lend them out profitably at a higher rate of interest. When consumers are struggling, banks aren't keen to lend and individuals aren't in a position to borrow. In short, bank lending is pretty dead right now, so there is minimal incentive to attract deposits by offering higher interest rates.
An optimistic view
Believe it or not, there is an optimistic view to be taken of the latest bankruptcy news:
- Since consumers have been steadily reducing debt burdens over the past two years, 2010 may prove to be the year in which bankruptcies peaked, setting the stage for improvement in 2011.
- The formal process of bankruptcies does ultimately help put liquidity back into the economy, by giving people a pathway towards starting over.
Is this optimism or simply wishful thinking? More and more, it seems as though the first quarter of 2011 will be pivotal in answering that and many other questions about the economy.
