Banks Wage Rate War For Deposits
Banks across the U.S. are engaged in a heated competition for deposits as the battered industry tries to shore up its funding sources.
From giant Citigroup Inc. to tiny S&T Bancorp Inc. -- which is based in Indiana, Pa. and has just 55 branches -- banks are responding to uncertain times by sharply increasing the interest rates paid on deposits.
The result is a boon for consumers hungry for higher returns as the stock market lurches. But the moves are causing pain for large and small banks across the U.S. by squeezing their profit margins.
The desire to lure depositors is triggering a 'national price war,' says Michael Poulos, a partner at financial-services consulting firm Oliver Wyman. 'In the past 15 years, there's been nothing like this. The level of competitive intensity is unprecedented right now.'
The deposit-collecting binge could help banks build up the funds needed to make new loans. That could help ease the credit crunch choking the economy.
But the scramble for deposits also poses a dilemma for lenders. Banks that don't boost interest rates to keep up with rival institutions will find it harder to attract money that can be funneled into loans. Banks that do jump into the fray are likely to see profit margins erode at a time when many already are struggling with rising loan losses and the weakening U.S. economy.
To attract new deposits, Citigroup has been deploying a double-barreled pitch of safety and hefty rates of up to 4% on six-month CDs.
Citigroup's offer has drawn the ire of far smaller Virginia Commerce Bancorp Inc., which has 26 branches. William Beauchesne, chief financial officer of the Arlington, Va., bank, last month blamed Citigroup for inflating deposit rates in northern Virginia. Trying to keep pace, Virginia Commerce is now offering CDs with interest rates as high as 4.5%. That is eroding the bank's profit margins.
Deposit levels have fluctuated from bank to bank as the industry's crisis has deepened in recent months. Some have reported large increases, including from customers who see banks as a haven from the market's volatility -- especially now that federal deposit-insurance limits have been increased. Other banks have suffered declines in deposits, with the steepest falloff at institutions beset with large losses.
The average rate of 2.61% on a one-year certificate of deposit as of Wednesday is up from 2% in early May, according to Bankrate.com, a North Palm Beach, Fla., financial-data provider. The jump comes despite Federal Reserve interest-rate cuts that have reduced the fed-funds rate to 1%. Such cuts usually lead to lower deposit rates.
One of the keys for banks to return to health is a resumption of the normal process of taking in deposits at low rates and lending at higher rates. Now, bankers say, this mechanism is under pressure. Deposits are coming in at unusually high rates, and can't be readily lent with the typical healthy net interest spread.
Executives at banks such as Fifth Third Bancorp and Webster Financial Corp. said their profits are suffering in part due to the new high rates. |
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