A recent report from Market Rates Insight, a pricing consultant to financial institutions, revealed that savers abandoned CDs in favor of more liquid savings accounts in the first half of this year.
In the first six months of 2011, investments in CDs fell from $1,978 billion to $1,884, a difference of $94 billion.
At the same time, balances in liquid accounts have ballooned by $446 billion.
"The reason we are witnessing such growth and shift in deposits despite meager interest rates is because consumers are very fearful about the economy, and are fleeing to the safety and security of insured and liquid deposits," said executive vice president of Market Rates Insight, Dan Geller, Ph.D., in a press release.
Deposits at banks have increased so drastically that at least one bank is charging interest for keeping deposits over $50 million. Other banks have also struggled with the wild increase in deposits, a story on Bloomberg.com reported last week.
Funds at U.S. banks swelled to $1.02 trillion in August, according to the story "U.S. banks said to seek relief from regulators as deposits swell."
Here's some insight into the regulatory issues from the story:
The extra deposits are problematic because they’re subject to withdrawal, so banks have to park the money in low-yielding short-term investments, Litan said. With few other choices available, banks have stashed their excess deposits at the Fed, which means the cash gets counted as assets.
This expands their balance sheets and thus pushes down their leverage ratio, which measuresTier 1 capital divided by adjusted average total assets; the lower the ratio, the weaker the bank, at least in theory.
Have you given up on CDs because of the low yield and lack of liquidity?
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