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Banks reap benefits from low CD rates

By Claes Bell, CFA · Bankrate.com
Monday, April 23, 2012
Posted: 12 pm ET

I've written a lot in this space about the Federal Reserve's actions keeping interest rates, including CD rates, low in order to goose the U.S. economy out of the Great Recession. But besides the wider economy, there's another beneficiary of bargain-basement CD rates: the banking industry.

One of the biggest expenses for banks is paying out interest to depositors. Lowering that number helps banks widen the spread between what they earn on the loans they make and the cost they pay to fund those loans.

Since deposit rates have tanked, banks' interest expense has shrunk dramatically. For instance, according to Bank of America's annual report, the fall in CD rates has reduced the bank's annual outlay for CD and IRA CD interest by more than $1.8 billion between 2009 and 2011.

From the perspective of the Fed, that windfall is probably a feature, not a bug. Not only do those extra billions help banks more quickly improve their balance sheets, but making banks' lending more profitable should make them more willing to lend, boosting the overall economy.

From the perspective of CD investors, that probably sounds like a Faustian bargain, but it's one the Fed will probably continue making until at least the end of 2014, if the Federal Open Market Committee's rate projections are to be believed.

What do you think? Is keeping deposit rates in the basement worth it if it increases lending and boosting economic growth?

Follow me on Twitter: @ClaesBell.

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1 Comment
Sheyna Steiner
April 23, 2012 at 3:04 pm

If lending did increase and banks increased capitalization and were demonstrably better positioned to avoid future catastrophes then it would be worth it.

I'm not sure how those goals are progressing but a part of that extra money is going to pay dividends and towards stock buybacks which seems to be controversial, to say the least.