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Banks Boost Interest Rates to Lure Deposits

'Price war' increases pressure on profit margins, loan funds

By Clay Dillow, Newser Staff

Posted Nov 14, 2008 11:03 AM CST

(Newser) – Banks are boosting interest rates on deposits in an effort to increase the supply of cash available for lending, resulting in what one consultant calls a "national price war," the Wall Street Journal reports. Many banks are pinched between the desire to build up deposits and the shrinking profit margins that come with paying higher interest on those funds. "Where you can really get hurt is on the liquidity side," says one banker.

With the federal funds rate plummeting—it's 1%, and rumored to be headed even lower—deposit rates would normally be dropping as well. But the competition for funds has seen some banks offering CD rates as high as 4.5%; the average rate on a 1-year CD was 2.61% Wednesday, up from 2% in May. The rate war is "potentially quite damaging," says the consultant. "It will be a drag on bank earnings."

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Federal Reserve Chairman Ben Bernanke has slashed Fed rates to one percent, usually an indicator that low deposit rates are on the way. Not so in these unpredictable economic climes. (AP Photo)

A Citibank is shown in Mountain View, Calif., Friday, Oct. 3, 2008. Big banks like Citi are funding recapitalization by offering attractive deposit interest rates, forcing smaller banks to keep up. (AP Photo/Paul Sakuma)

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In the past 15 years, there's been nothing like this. The level of competitive intensity is unprecedented right now.
- Michael Poulos, partner at financial-services consulting firm Oliver Wyman

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Banks Boost Interest Rates to Lure Deposits