Bailout Profits May Affect Savings Account Interest Rates
April 22, 2010
The U.S. Treasury has reported that it will begin selling the shares of Citibank it purchased as part of the bank bailout programs. What does this have to do with bank interest rates on savings accounts?
Plenty.
Savings Account Interest Rates Dictated by How Badly Banks Need Your Money
In 2008, the U.S. Treasury gave Citibank $25 billion, and took 7.7 billion shares of Citibank stock in return. This enormous infusion of much-needed cash changed the math for savings account interest rates. Savings account interest rates, that is, are directly and inevitably linked to how badly the banks need your money. Anything that decreases a bank's need to draw in more deposits--for example, an enormous infusion of government money--is likely to drive savings account rates lower, as banks get cheaper money elsewhere.
This dynamic is easily observable by looking at the low savings account interest rates being paid by bailed out banks that, yes, would like taxpayer money, but can get money from other places, too.
The Long-Term Impact of the "Wipe Out the Shareholders" Mentality
The structure the Citibank bailout may have a long-term impact on savings account rates due to the "wipe out the shareholders" mentality that accompanied the bailout. No one ever cried "wipe out the depositors." Everyone agreed that the owners of Citibank stock should take the hit. If anything similar were to ever be needed, it's likely that model would be followed again.
Ironically, this determination that depositors should be the last ones to lose money when banks get in trouble may actually depress savings account interest rates. When it comes to banking, the rule remains: the less at risk consumers' money is, the less they get paid for letting the bank use their money.
