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?