By now, the nearly industry-wide rise in bank fees is well documented. Millions of checking account holders who had previously considered free checking a given are being asked to meet certain account criteria or pay a monthly account maintenance fee.
But less attention has been paid to rising fees for CD investors. David Lazarus of the Los Angeles Times has an interesting article on how major banks are raising early withdrawal penalties to levels high enough to attack CDs' principal if investors pull out early:
In the past, BofA would charge 90 days' worth of interest for early withdrawals from a CD good for 12 months or less. In other words, a $10,000, 12-month CD with an annual yield of 0.3 percent would entail an early-withdrawal penalty of about $7 if you took out the entire amount.
Now BofA is charging a flat $25 plus 1 percent of the amount withdrawn for CDs with terms under 12 months and 3 percent for longer terms.
That means the early-withdrawal penalty for that same $10,000, 12-month CD now runs $125 -- a nearly 1,700 percent increase. The penalty for a five-year, $10,000 CD is $325 -- a roughly 1,600 percent increase.
Since those penalties are significantly above what BofA is offering in interest for those maturities, investors stand to lose out on a good chunk of principal even if they hold the CD for nearly the entire term before pulling out.
And BofA isn't the only bank imposing harsher penalties for CD investors:
Similarly, Chase bank revamped its own early-withdrawal policy for CDs last year, introducing a $25 fee plus 3 percent of the amount withdrawn.
Lazarus says the new fee hikes by banks are a result of them being "motivated solely by greed." I think Lazarus is missing something here, though. The extent to which banks are motivated by greed doesn't appear to have changed drastically in the last couple of years, but they've waited until now to introduce draconian new fees on CD investors. So what has changed?
Heightened federal regulation and limitation on bank fees are no doubt a contributing factor. I spoke to Bert Ely last year about the cutbacks in free checking, and he likened bank fees (and profits) to a balloon: Squeeze them in one place and they'll just expand in another.
But I think the larger motivator may be banks are trying to lock CD investors' money in at rock-bottom CD rates now. That way, rates can rise, but banks' cost of funds, the money they pay to have cash on hand to lend out, will stay the same.
But if CD investors simply withdraw their money when CD rates rise, banks won't be able to enjoy that long-term cost of funds advantage. So banks are boosting withdrawal penalties to keep that from happening.
Why do you think Chase and BofA are raising early-withdrawal penalties? Is it regulation or positioning for higher rates in the future? Or is it some combination of the two?