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Some banks push out CD investors

By Claes Bell, CFA · Bankrate.com
Monday, October 31, 2011
Posted: 3 pm ET

Are banks so flush with cash they're literally turning CD investors and other depositors away? It looks that way, at least with some financial institutions.

I've been writing for a while now about how the combination of excess deposits and a lack of loan demand at U.S. banks have been depressing CD rates. Last week, Eric Dash and Nelson D. Schwartz of the New York Times had an interesting article on how that trend has now progressed to the point where some banks are openly trying to thin out the ranks of their CD investors:

"We just don't need it anymore," said Don Sturm, the owner of American National Bank and Premier Bank, community lenders with 43 branches in Colorado and three other states. "If you had more money than you knew what to do with, would you want more?"

Like Mr. Sturm’s banks, Hyde Park Savings Bank, a community lender in the Boston suburbs, lowered its CD rates this spring to encourage less-profitable customers to move on. As a result, Hyde Park shed about 1,000 of its 35,000 CD holders, preferring customers who also had a checking or savings account.

It's not hard to see why banks are taking these types of actions. Banks make their money, in part, on the spread between how much they pay to hold on to deposits and how much they get paid in interest on loans.

That's gotten much harder. U.S. businesses are trying to get rid of debt, not take out loans, thanks to tepid consumer demand and general economic uncertainty. Consumers haven't been much help either, what with their efforts to pay down debt accrued during the boom and the struggling housing market.

Oh, and don't forget everyone and their mother is trying to find a safe place to stash their own savings, and many choose FDIC-insured bank deposits. In the end, banks are left with great big piles of money and nowhere safe to put it where it will make them enough money to stay profitable.

That being said, that's not your problem. Regardless of their banks' troubles, CD investors shouldn't settle for anything approaching the .36 percent average yield for a one-year CD found in Bankrate's last weekly survey.

If you're seeing yields like that on your CDs, take the hint that your bank doesn't value your deposits anymore and move your money. While you're not going to find yields much higher than 1 percent on one-year CDs, that still amounts to more than twice the aforementioned average rate.

What do you think? Why do you think banks are kicking CD depositors to the curb?

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4 Comments
NO stocks 4 me
November 02, 2011 at 2:45 pm

I may be computer savvy, used to build them and do software back when they started selling as home use, but I still like to be able to walk in and look someone in the face that holds my life savings.

Also with some sort of relation ship you might be able to get your money when you really need it. Like when a big bank went down in CA I knew it was time to move some funds out of the same bank, the financial guy helped me save 14K in penalty by getting the maturity date moved up to the next day from 2 years still to go.

But back to the point of the article , I ran into this even at my local Credit Union, the manager was actually happy when I closed my 6 figure CD lol. I actually found better rates (if you think rates at 1% are better, smirks) at the local "brick", Sun trust and BB&T. with higher FDIC limits I can at least consolidate to 2 banks while keeping my everyday checking at another(for now)

Claes Bell
November 01, 2011 at 1:24 pm

Wolverine, you've got a point. Economists call that the "paradox of thrift," and it's a major reason why John Maynard Keynes advocated counter-cyclical deficit spending by governments to kind of push countries out of the downward spiral the paradox creates.

Wolverine
November 01, 2011 at 1:04 pm

This is why the economy makes no sense.

Because of the economic environment, everyone wants to save money (logical) because the economy isn't doing well... yet the economy needs people to spend MORE in order to recover...

Wonderful catch 22.

Ray
November 01, 2011 at 9:25 am

The banks can do what they want. You can vote with your feet.

The current landscape has seniors in a bind, particularly those who are computer illiterate or at least uncomfortable with anything other than "bricks and mortar" banking. Their retirement planning is predicated on getting some kind of yield on their "chicken money" (money they are not willing to risk, which in some cases is all of their money).