Low CD Rates Will Drop Even Further, Experts Predict
It wasn’t too long ago that you could have put your money into an ordinary long-term certificate of deposit at a savings and loan, lock in a high double-digit interest rate and reap a very healthy profit.
If you had put $10,000 into a five-year CD paying 13% in August, 1984, you could have reaped a yield of more than 18% and nearly doubled your investment by last month. But such high-paying CDs don’t exist today, and depositors have been seeing rates at S&Ls; plunge since April.
And with the government now feeding billions of dollars into the deposit streams of sick S&Ls; under the recently adopted thrift bailout law, the prospects are that CD rates will eventually be pushed down further--despite a slight upturn in rates in the last few weeks.
Effect of Law
It is not entirely clear yet if the new law, designed to restructure and recapitalize the industry, is having--or will have--the effect of lowering overall deposit rates, said industry experts and executives.
Under the law, federal regulators have replaced high-interest deposits at 67 insolvent S&Ls;, including Irvine-based Lincoln Savings & Loan, with $3.3 billion in lower-cost government funds. About $12 billion more is expected to replace other high-cost deposits in the coming weeks.
“It’s hard for us to be able to say that what we have done has influenced the marketplace overall,” said Steve Katsanos, spokesman for the Resolution Trust Corp., created under the law to dispose of insolvent institutions.
“Others are telling me that they’re seeing bank rates going up. That tells me that banks are seeing an opportunity to attract new depositors.”
Large banks and S&Ls; in California apparently have launched an interest rate war to woo customers from sick S&Ls.;
The average annual yield on six-month CDs offered by the 10 largest banks and S&Ls; in Los Angeles and San Francisco is 8.46% and 8.49% respectively, contrasted with an average of 8.28% in several other major metropolitan areas tracked by 100 Highest Yields, a newsletter that monitors CD interest rates nationwide.
End to High Rates
But while banks and S&Ls; will try to capture billions of dollars in CDs maturing in October, many industry leaders don’t see higher interest rates lasting much longer.
Customers are already wary of the possibility of lower rates for shorter-term accounts--15- to 90-day CDs--and are starting to put their money into accounts with terms of nine months and longer, said Stephen W. Prough, president of Western Financial Savings Bank in Orange.
“They’re trying to lock in current rates for a long time,” Prough said. “There’s a perception out there that these (longer term) rates are pretty good rates and may be better than shorter-term rates in the future.”
Currently, financial institutions are paying more for shorter-term accounts--an indication that savers aren’t sure where rates are going in the future. Usually, institutions pay more for longer-term accounts.
Prough said the trend, probably fostered by the attention given to the new federal law, is causing his S&L; to re-evaluate its deposit rates.
Katsanos said regulators hope they can use the new law to drive down artificially high rates at insolvent institutions, which have long been offering higher rates to attract funds. In areas such as Texas, Arizona and California, such higher rates have driven up deposit prices at competing healthy institutions.
While financial institutions, especially in Texas--where the largest number of insolvent thrifts are located--will feel the brunt of the bailout law, those in other areas of the country that escaped much of the industry collapse aren’t expected to see much of a change in deposit rates, said Robert K. Heady, publisher of 100 Highest Yields. In Texas, troubled S&Ls; have been paying premium above-market rates to attract deposits.
In Orange County, where more S&Ls; have failed than in any other California county, some of the state’s bigger and healthier S&Ls; are seeing deposit rates go down primarily as part of the overall decline in rates, not as a result of the new law.
Most executives, such as Charles H. Green, acting president of FarWest Savings & Loan in Newport Beach, believe the new law hasn’t had any effect yet, though it might soon become a force.
“Our rates have come down with money market rates, which is the law of economics, not the recently passed one,” he said. “Until regulators attack the big (insolvent) shops, we probably aren’t going to see any noticeable decline.”
Because the new law also stiffens requirements for capital--an institution’s final reserve against losses--many S&Ls; are also curtailing their growth to meet those requirements. That means they also are limiting the deposits they take in--opening the door for large, healthy S&Ls; and banks to capture a bigger share of the CD market.
Some S&L; executives also see one area where rates seem to be falling faster--the jumbo $100,000 CDs. Those deposits, usually from out of state, are called wholesale deposits when generated by institutions themselves or brokered deposits when S&Ls; pay money managers to bring in the funds.
“I think the bill is simply supporting what had been anticipated by the wholesale market,” said Fredric J. Forster, president of Newport Balboa Savings in Newport Beach. He said the falling rates have turned into a plus for his S&L;, which is enjoying the strongest inflow of deposits ever.
Two institutions often near the top rate payers in the nation, according to Heady’s 100 Highest Yields, are taking different approaches as the new law takes hold on the industry.
Beach Savings Bank in Fountain Valley, often rated one of the stronger S&Ls; with high CD rates, will continue to pay rates at the high end, said Ernest Thompson, the S&L;’s president. But, he acknowledged, “we’re a pretty small fish.”
Guardian Savings & Loan in Huntington Beach, though, is cutting its rates and looking for deposits from local residents. At the start of the year, more than 50% of Guardian’s deposits came from jumbo CDs it solicited, said John Storck, vice president of branch administration. Now the figure is down to 20%, he said.
