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Savers choose cash over CDs

By Sheyna Steiner · Bankrate.com
Wednesday, August 31, 2011
Posted: 3 pm ET

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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3 Comments
don
September 07, 2011 at 4:03 pm

I'm still sticking with my CD ladder (made up of all 1yr. CD's, so that in any particular month I have some cash freeing up).

Using Banrate.com for top yields, and only with banks of 4 stars or more (my latest 1yr. CD to mature, re-invested at 1.20%APY - kind of hurt, but safe if anything is)
.
Alternatives are either too risky (I'm retired), or are complex - I don't like complexity where my savings are concerned.

I often read your CD rates blog, to see what's the latest.

tarmale
September 05, 2011 at 9:44 am

So true, my 5 year cd's are just coming to an end. I had laddered them at 4.5% and now I can renew them at .75%. However, my bank is only paying me .25.

Deadpool
September 01, 2011 at 8:31 am

Of course people are abandoning CDs. Who wants a 1 year CD at 0.1%?

Wait til the first quarter and second quarter of 2013 comes around. All those people who were lucky enough to secure 5.0% CD's back in 2008 start are going to startseeing what the new 5 year CDs look like and probably have an aneurism.