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Can regulation affect CD rates?

By Sheyna Steiner ·
Thursday, March 31, 2011
Posted: 8 am ET

Banks have been smacked with the regulation stick repeatedly in the past year or so, and banks have ratcheted up fees in response. Services such as free checking and debit rewards cards have also been curtailed.

But are banks also keeping CD rates and money market account rates very low as a way to pad their bottom line?

I asked Bert Ely, a banking industry consultant and president of Ely & Company in Alexandria, Va., if consumer-friendly and small-business-friendly regulations could be keeping savers short-changed.

"(Regulations) may have some effect, but its all opinion. I think the low rates are ultimately a function of monetary policy and secondly, the conditions in the marketplace," he says.

So while there may be some impact on CD rates, the more obvious factors pushing down CD rates probably don't need a lot of help.

"Take a look at short-term interest rates of all types including Treasuries, agencies, money market mutual funds. The rates are all pretty low. The banks have to bring down their costs of funds enough to deal with the fact that they are not getting much in the way of interest rates on their loans," says Ely.

The Federal Reserve Open Market Committee sets short-term interest rates. In December 2008, after nearly two years of steadily lowering interest rates, the FOMC declared the intended federal funds rate to be 0 percent to 0.25 percent

"At the margin, the banks are facing the issue of making up for the impact of federal restrictions on credit card fees, overdraft fees and debit card swipe fees," says Ely.

"We're seeing a variety of ways that they are responding -- the most visible of which is pushing up the fees on checking accounts. But that only gets you so far, so trying to hold down deposit interest rates is another way to do it. But banks as a whole have a lot of money on deposit; they don't need to bid up rates," he says.

While some banks offer higher-than-average CD rates to foster relationships with their customers they're far from the norm.

"A lack of deposits is not the problem in the banking industry. With relatively weak loan demand, who needs the deposits?" says Ely.

Banks that need deposits, due to high loan demand or financial instability, attract money by offering temptingly high rates on deposit products. You can check the stability of financial institutions using Bankrate's Safe & Sound star ratings.

Online banks and credit unions also often offer higher-than-average CD rates. Where have you found good deals?

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