Americans are pumping money into bank accounts at a blistering pace this year, sending deposits to record levels near $10 trillion on escalating fears that the U.S. economy is on the verge of another implosion.
There's no sign that the flood into checking, savings and money market accounts is slowing down. In the last three months, accounts at U.S. commercial banks have increased $429 billion, or 10%, almost double the increase for all of last year.
There's one big problem: Banks don't want your money.
"Banks and credit unions are doing everything they can to get rid of the cash except make loans," said Mike Moebs, a Lake Bluff, Ill., banking consultant.
He said banks are driving away deposits by refusing to renew CDs at higher rates and by imposing fees on checking accounts for depositors who don't use other, profitable financial services as well.
During the housing boom, banks gobbled up deposits — including plenty of "hot money" provided by brokers chasing high interest rates for their clients — to fuel binges of mortgage and construction lending. The collapse of home prices and the ensuing financial crisis caused nearly 400 banks to fail, more than at any time since the savings and loan meltdown in the 1980s.
The latest flood of deposits has occurred in spite of banks paying the lowest interest rates on record for money they know could flow back out if the economy improves. Similar "flights to safety" with huge deposit inflows occurred in late 2008, when the financial crisis struck, and in 1999, when fears of massive defaults on Russian debt panicked investors.
The large amount of cash only adds to expenses such as paying for deposit insurance premiums. With lending standards tight as a drum after the financial fiasco, and demand for loans growing only slightly, banks have been doing everything they can to demonstrate how little they need new cash.
In the most obvious sign, they have slashed interest payments to discourage customers. Wells Fargo & Co., which has the most branches in California, halved its payments on one-year certificates of deposits to 0.1%; Citigroup, which paid 2% in 2009, dropped its payment to a paltry 0.3%.
And in a possible glimpse into the future, one New York banking giant is even charging big customers for the right to park money there. The Bank of New York Mellon is forcing institutional clients to pay fees if they deposit more than $50 million into an account.
For bankers like John Biggs, who runs Santa Rosa, Calif., thrift Luther Burbank Savings, the strategy was to always court deposits using high rates to enable growth while keeping costs down. Now he's not sure what to do.
In 2007, Luther Burbank was offering a whopping 5.4% interest rate on a one-year CD. The Sonoma County bank used money from new customers to expand into Southern California by opening branches in Encino, Burbank, Pasadena and Beverly Hills.
Those days are definitely over. Biggs' savings bank now pays just 0.9% on the investment. That means for every $100 his customers lock up for a year, they'll get back just 90 cents extra — a difficult thing to explain, he says, to retirees accustomed to living off their interest checks.
Still, it beats the 35 cents that savers in Southern California would get from Bank of America, the 30 cents they'd get from Citibank and the 10 cents they'd get from Wells Fargo, according to researcher Bankrate.com.
"In all honesty, I'm not happy," said Biggs, who has been with the company since the mid-1980s. "Our philosophy is that we are a savings bank; we are rate payers. We will continue to pay you rates at the top of the market. That's just not very good right now."
Part of the problem, he said, is that the "government has chosen to drive down rates to abnormally low levels" — a reference to the Federal Reserve slashing interest rates to the bone to encourage Americans to borrow money cheaply and spend it.
But the negligible bank rates have punished retirees and others who depend on interest income, which plunged 40% to $546 billion last year from $903 billion in 2008, according to the federal Bureau of Economic Analysis.
The Fed has pledged to hold short-term rates near zero through mid-2013 unless the economy improves as a way to combat the nation falling back into a recession. That's going to continue to cause pain to savers, and could force banks to become even more stringent about their intake of new deposits.
Bankers such as Robert H. Smith, former chairman of L.A.'s Security Pacific Corp., say the industry is being throttled by a combination of the weak economy and regulations that were tightened in the aftermath of the financial crisis.
"What little demand that is out there for loans is regarded very skeptically [by the banks] because of the pressures from the regulators," said Smith, who sold Security Pacific to Bank of America 20 years ago and is now a founding director of Commerce National Bank in Newport Beach.
The banks also have another problem: what to do with all the billions of dollars in temporary deposits being parked by giant corporations, institutional investors and retail customers.
Like Biggs' depositors, they are stashing it in a safe but unrewarding place: Federal Reserve banks, which are paying them an interest rate of just 0.25% to tend the funds. Such deposits rose to more than $1.6 trillion at the end of August from about $1 trillion a year earlier, according to the Fed.
And until new lending grows strong and depositors start pulling funds out to invest elsewhere, banks will have little reason to increase rates. They now are even lower than in 2003, when the Fed pushed rates down to then-record lows after the Internet bubble popped.
"I never imagined yields would get lower than what we saw in 2003," said Greg McBride, senior analyst with Bankrate.com. "Well, in Japan maybe. But not here."