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Why we're socking our money away

September 21, 2011

| Money Rates Columnist

Banks across the country are seeing a historic flood of money pouring into FDIC-protected checking accounts, savings accounts, certificates of deposit and money market accounts.

According to the Wichita Eagle newspaper, the amount sitting in the insured accounts in the first six months of 2011 totals $9.8 trillion--an all-time high.

The size of the deposits is less a reflection of a newfound interest in saving as it is a lack of other investing options. Investors are worried about the recent volatility of the stock market, and businesses with deposits are leaving money in the bank rather than hiring or expanding due to concerns about the economy.

Like even the best CD rates and the best savings accounts, the interest rates on other investment tools, such as government or municipal bonds, are too low to be enticing, the Eagle said.

Banks are normally thrilled to have large deposits because they make money by lending the money out and charging interest. But the current situation is different; demand for loans by both consumers and businesses is weak, and the banks' ability to make money by investing the deposits in bonds is limited because of low interest rates.

In fact, the large deposits and dearth of loan applications may be costing some banks. For instance, the Bank of New York Mellon, which handles deposits for large industrial clients, recently told its customers it was going to charge--yielding, in effect, a negative interest rate--for balances larger than $50 million. Idle deposits also cost so-called retail banks--such as the ones you and I use--in FDIC insurance fees and other expenses.

The investing website Motley Fool argues that people who stick their money in a checking, savings or money market account rather than investing it are making a big mistake--even when the market is uncertain. The Fool notes that leaving your money idle means its value is being eroded by inflation and taxes.

Your responses to ‘Why we're socking our money away’

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23 September 2011 at 9:43 am

Of course, Motley Fool is a well known stock pumper site.

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