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New overdraft regulation pulls down CD rates

By Sheyna Steiner ·
Friday, July 16, 2010
Posted: 12 pm ET

A recent analysis from Market Rates Insight reported that in the first week after Regulation E took effect on July 1, the national average rate for deposits dropped 0.06 percent.

Regulation E mandates that banks may not automatically enroll customers into their standard overdraft plans. Unless consumers opt in to the coverage, neither debit card transactions nor ATM withdrawals that would overdraw the account will be paid.

Analysts predict that banks stand to lose billions in overdraft fees.

What's interesting is that a study by the FDIC found that it's actually a very small percentage of the population who pay the bulk of overdraft fees, repeatedly overdrawing their bank accounts.

Unfortunately, to make up for lost revenue banks may increase maintenance fees on checking accounts and ratchet down yields on deposit products and that means lower CD rates.

My personal opinion is that there is very little overlap between the populations who repeatedly pay overdraft fees and those who regularly invest in CDs.

According to Market Rates Insight press release on Regulation E, long-term CD rates have experienced the most declines since the rule went into effect. CD rates for the typical 48-month and 60-month CDs fell 0.13 and 0.07 percent, respectively.

The press release concludes that as the overdraft rules will reduce bank income by 15 percent, or $15 billion, consumers can expect an annualized 0.19 percent decrease in the national average rate for deposits, or about $15 billion dollars.

While we no longer need to fear overdraft charges thanks to wanton debit card use, CD rates are going to suffer because of it.

My embarrassing confession, I'm thrilled about the new rule. On a couple of occasions, checks and mistimed purchases cost me a lot. Now I have a savings account linked to my checking account for just such emergencies but nonetheless I think it's reasonable to have your debit card declined at the point of sale if you don't have the money to cover it.

What do you think of the new overdraft rules: fair or not?

Watch this video for more on Reg E.

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July 18, 2010 at 7:35 pm

Personally, i think its a great thing. I would rather get my request declined at the point of sale/transaction than to pay overdraft fees. I maintain my account fairly well but still got dinged by over draft charges 2 times in last few years. It just didn't sound fair when i had to pay for it. Now i have my saving account liked to the checking account to cover for it.

July 17, 2010 at 12:24 am


As someone who works at a bank -- those investors should seek something a bit more riskier that what is available at a bank-- A bank is for storing for a rainy day or after you have saved enough to retire on the principle not the interest on a standard bank cd. The rates of return when you retire will not be guaranteed

Sheyna Steiner
July 16, 2010 at 3:12 pm

There's always the law of unintended consequences. Though it is cutting out an arguably abusive practice, it effects a much wider swath of the banking population than the 10 percent who regularly overdraw their account.

And I'd take issue with the word everything, I suppose. I'm cautiously optimistic about some of the Dodd-Frank Act.

What else is hurting us?

July 16, 2010 at 3:02 pm

Its incredible that everything coming out of Washington is hurting consumers, small business and investors.