Shrinking Rates at Banks
It is getting tougher to make a buck when your money is in a bank these days.
Responding to lower returns on everything from mortgage loans to Treasury bills, banks have been cutting the rates they offer to depositors. Only a few years ago, for example, you could find interest rates in the 10% range on long-term certificates of deposit. Today, you’d be lucky to get 8%.
And now, banks are slashing rates on even the most stable accounts--passbook and statement savings--which have been paying consumers more than 5% interest since the 1970s.
Bank Rate Monitor, a North Palm Beach, Fla., interest rate news service, surveyed the 100 largest savings institutions in April to determine what was happening with savings rates. The results, which were released last month, showed that passbook savings rates have inched downward in most major cities.
Rate cuts also have hit statement savings accounts, which are similar to passbook accounts but include less paperwork. Statement and passbook savings rates are relatively stable; however, any rate changes that might have occurred after April 1 are not reflected in the survey.
Washington-based institutions, for example, have dropped passbook savings rates by an average of 0.34 percentage point. New York banks and thrifts have pared their rates by about 0.14 percentage point. In Chicago, passbook rates have fallen by about 0.11 percentage point. They’re down 0.10 percentage point in Detroit and 0.06 in Los Angeles. Nationwide, passbook rates have dropped by 0.10 percentage point to 5.01%, and statement rates have fallen by 0.13 percentage point to 5.09%.
These changes may seem small, but there is a whopping $421 billion deposited in passbook and statement savings accounts nationwide, so even relatively tiny rate cuts end up costing consumers hundreds of millions of dollars, said Hugo Ottolenghi, editor of Bank Rate Monitor.
Moreover, the averages obscure some reasonably sharp rate changes at many of the country’s largest financial institutions.
New York-based Citibank, for example, slashed its passbook savings rate over the past year by a full percentage point, from 5.5% to 4.5%, according to the Bank Rate Monitor survey.
Harris Trust & Savings Bank in Chicago cut its passbook and statement savings rates by 0.60 percentage point to 5.15% from 5.75%. State Street Bank & Trust in Boston pared statement savings rates to 4.5% from 5%. (Notably, State Street was paying 6% on statement savings accounts and 8.5% on passbook accounts in 1989. Now, the passbook accounts pay 5.5%, according to the national survey.)
In Philadelphia, Beneficial Savings and Germantown Savings both cut their rates to 4% from 4.5% a year ago. Manufacturers National Bank in Detroit, meanwhile, pared its rate to 4.75% from 5%. And American Savings in Los Angeles shaved 0.12% off its statement and passbook rates, which now stand at 4.88%, Ottolenghi said.
Clearly this is bad news for consumers.
If the past six months is any judge, a 4% or 5% rate is not even going to keep pace with inflation. In other words, although you may have more money at the end of the year, you’ll be able to buy less with it. And after you account for taxes, the real rate of return will be even lower.
Of course, passbook accounts have never been a road to riches, but they’ve always provided safety and convenience for small investors. And at many points in the past, they’ve offered yields that were comparatively more attractive than they are now--even if they weren’t overly generous.
What’s a consumer to do? If nothing else, individuals should pay more attention to their savings and consider managing their money more actively, Ottolenghi said. However, unless you’ve got tens of thousands of dollars in the bank, this sort of money management isn’t going to net you a fortune. So, you probably don’t want to spend hours investigating your options.
But, in many cases, consumers will find that they could earn between 1 and 2 percentage points more by just moving their savings into a different type of account--possibly a money market or interest-bearing checking account--at the same institution, experts say. Finding that out shouldn’t take more effort than a phone call.
And those who do not need instant access to their funds might consider investing at least a portion of their savings in longer-term instruments such as certificates of deposit.
For example, if you had $2,000 in savings, you might want to keep a small portion of the total in a passbook or money market account for easy access in financial emergencies.
The rest of the money--assuming you have no reason to believe that you’ll need it any time soon--could be placed in longer-term, higher-rate accounts. However, remember that if you need the money before the certificate of deposit matures, you could lose a portion of the interest you’ve earned.
