Fed’s gift to banks is costing savers
Who’s really bailing out the banks?
Taxpayers, for sure. But the largely unsung victims of the financial system rescue are loyal bank depositors -- especially older people who have relied on interest income from savings certificates to live.
To save the banks from soaring loan losses, the Federal Reserve did what it always does when the industry gets into trouble: Policymakers hacked their benchmark short-term interest rate, which in turn pulled down all other short-term rates, including on savings vehicles.
But this time the Fed went to rock-bottom on rates. In December, the central bank declared that it would allow its benchmark rate to fall as low as zero.
Savers still are paying the price for that gift to the banks. Average rates on certificates of deposit nationwide have continued to slide this year, according to rate tracker Informa Research Services in Calabasas.
The average yield on a six-month CD fell to 1.27% this week, down from 1.86% on Jan. 1 and 2.24% a year ago.
Anyone who has a CD maturing soon should be prepared for serious sticker shock.
Banks have been able to continue whittling down savings yields because the industry overall is flush with cash -- not just from the Fed’s efforts to pump unprecedented sums into the financial system, but also because the events of the last year have left many people too afraid to keep their money in anything but a federally insured bank account. At least you know your principal is guaranteed.
Even as short-term interest rates have dived since the financial crisis exploded in September, the total sum in CDs under $100,000, as well as savings deposits and checking accounts, has soared by $507 billion, to $6.07 trillion, according to data compiled by the Fed.
By contrast, stock mutual fund assets have plunged to $3.2 trillion from $5.2 trillion in the same period, as share prices have plummeted and as some investors have yanked their money from the market in favor of safer places -- particularly banks.
Savings instruments that usually offer competition to banks are even less compelling these days.
Money market mutual funds, which buy short-term IOUs of companies or government entities, are paying an average yield of just 0.2% currently, according to IMoneyNet Inc. in Westborough, Mass.
U.S. Treasury bills pay almost nothing, as well. After rebounding modestly earlier this year, T-bill yields have been sinking again in recent weeks. Six-month T-bill yields were at 0.3% on Friday, down from 0.5% in late February.
Of course, the economy as a whole is benefiting from the Fed-engineered crash in interest rates. Mortgage rates are near record lows, which has fueled a refinancing wave that is saving Americans billions of dollars on their monthly payments.
But as they try to rebuild their balance sheets, bankers naturally would like to pay as little as they can for deposits and charge as much as they can for loans.
Wells Fargo & Co., which bought rival Wachovia Corp. late last year, trumpeted this week that it was able to hold on to 56% of the deposits in high-rate Wachovia CDs that matured in the first quarter. Wells persuaded most of those customers to shift to “lower-cost checking and savings accounts, in addition to lower-rate CDs,” the bank said in its quarterly earnings report.
On the loan side of the equation, however, someone is standing in the way of banks’ opposite goal of maximizing rates: Uncle Sam.
Given the federal government’s taxpayer-funded capital injections into hundreds of banks, the industry now is mired in a major public relations mess over plans to raise credit card rates and fees.
President Obama summoned leading bankers to the White House on Thursday to try to jawbone them on credit card charges, declaring that “the days of any-time, any-reason rate hikes and late-fee traps have to end.”
Another fight may be brewing over the extent to which banks will be willing to modify troubled mortgage loans to save more homeowners from foreclosure.
Politically, bashing banks on loan rates is a no-brainer so long as the industry is on the receiving end of taxpayer capital. And some of them may need more of that capital if they fall short on the “stress tests” that banking regulators have just completed.
As bankers are quick to point out, government money isn’t free: Banks must pay the Treasury an annual dividend yield of at least 5% on any capital infusions.
From savers’ viewpoint, all of this is insult heaped on injury. Most savers would be thrilled to earn 5% on their money, but with short-term interest rates so depressed, a 5% CD yield is only a dream.
And if banks face increasing pressure to hold the line on loan rates and fees, their only option for increasing earnings may be to pay even less for deposits, thereby widening the “spread” between their cost of money and what they can earn by lending it.
You tell me: What is the likelihood of Obama calling a meeting of bankers to attack them for paying too little on CDs and other savings accounts?
For savers, the standard advice in times like these is to at least take time to shop around for accounts. Some banks want your money more than others, and they all offer the same federal deposit insurance.
Beyond that, this is just a waiting game -- waiting for the economy to get better so the Fed can end the days of ultra-cheap money that bails out borrowers at savers’ expense.
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