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Banking Reform and You: Shopping for a Bank (Part 3 of 3)

July 21, 2010

| MoneyRates.com Senior Financial Analyst, CFA

The ability of depositors to switch banks is probably the most powerful market force keeping the banking industry competitive. Is your institution no longer offering the best money market rates? You're free to compare rates to find a higher yield. Did your bank send notice in the mail that your savings account monthly fee is up? A few minutes spent browsing online can help you identify a better deal.

But financial reform adds a few new considerations to your choice of a new bank. What are they? What should banking customers do or avoid once the rules kick in, or even before?

This is the final part of MoneyRates.com's three-part series on how financial reform affects bank customers.

Changes in the Banking Landscape

We saw in previous installments of the series (Part 1 on financial system safety and Part 2 on the costs to banks and customers) that financial reform means to change the banking landscape in a few key ways:

  • New proprietary trading rules limit high-risk investing using consumer deposits. This increases the safety of the financial system but restricts profit opportunities--so attracting deposits becomes less important to banks.
  • Higher deposit insurance levels give deposits more protection.
  • Higher compliance costs and regulatory levies will likely raise the cost of doing business for banks.
  • Big banks may be affected more than small banks. Not only do some of the levies specifically target large banks, but those institutions were also the ones engaged most heavily in proprietary trading, which will be curbed.

Do's and Don'ts for Bank Shopping, Post-Financial Reform

These changes to the banking industry have implications for how you should go about shopping for a new bank. Here are four tips to follow:

DO keep a close eye on your bank in the months and years ahead. Maybe you've always been happy with your bank and found their fees and bank rates competitive. However, things could change as the new law is implemented. Keep an eye out for new fees and reductions of services, and regularly compare savings account rates, money market rates, and CD rates with those of other banks on MoneyRates.com to make sure your bank is staying competitive.

DO consolidate your accounts. Higher cost structures are likely to prompt banks to refocus on their most profitable customers. This may mean higher account minimums for free checking and other benefits. If you have your money spread among different banks and accounts, look at consolidating or reallocating it to meet new account requirements.

Note that with the Federal Deposit Insurance Corporation (FDIC) insurance limit permanently raised to $250,000, depositors with more than $100,000 can now consolidate deposits more heavily to take advantage of higher rates and other perks offered to premium customers.

DON'T assume conditions are the same all over. The new rules will prompt changes to bank practices, and you may hear generalizations about those changes, such as "free checking is disappearing" or "bank rates are low across the board." While these generalizations may be true for the banking industry in aggregate, banking is a highly fragmented market: there are literally thousands of FDIC-insured institutions out there.

If your bank raises a fee or offers a paltry deposit rate, it's worth looking for other options, because you very well might find another institution offering account services with lower (or no) fees or higher bank rates.

DON't ignore small banks--or automatically shun big banks. Broaden your search from the usual household names. Increased Federal Deposit Insurance Corporation (FDIC) levies and reductions in proprietary trading are two effects of financial reform that will hit large banks--those with billions in assets--harder than small banks.

Of course, banking is a competitive business, and large banks still have economies of scale and other cost advantages, so don't rule anything out. Just be open-minded--and wide-ranging--in your search.

Even with all the new rules, there will still be plenty of banks competing for business. The trick is to find the institution that is most competitive for your needs and banking habits, whether you care most about the best interest rates on savings, money market accounts, and CDs, customer service, mobile access, or any other factor.

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