Big Banks Refuse to Budge on Low Interest Rates

NEW YORK (MainStreet) – Customer outcry and the real threat of mass defections to credit unions prompted Bank of America (Stock Quote: BAC) to cancel its proposed debit card fee, but could similar competitive pressures have the same effect on the big banks’ interest rates?

After all, credit unions consistently offer more competitive rates than banks, and online-only banks likewise tend to offer more attractive deposit rates than the bricks-and-mortar banks do. As consumers become aware of the alternatives, might banks start to raise their rock-bottom rates to stay competitive? For the time being, it doesn’t look likely.

The Credit Power Index, which measures the interest rate climate at the country’s banking institutions, got worse for consumers for the third consecutive month in October. Once again, plunging deposit rates are to blame.

As of the end of October, the average 12-month certificate of deposit provided a return of just 0.38%; when limited to banks only, that average drops to just 0.35%. By contrast, the average credit union gives a return of 0.63% on the same product, and online banks tend to offer rates closer to 1% – Ally Bank, for instance, has an 11-month CD with a return of 0.95%.

The overall downward trend in deposit rates is easily explained by the Federal Reserve’s effort to spur lending in the wake of the recession by keeping interest rates low, with the inevitable side effect of falling deposit rates. The Fed’s announcement in August that it will keep rates low through 2013 sent deposit rates plunging even further.

But at a time when popular movements have sprung up to encourage people to leave their banks en masse and online-only banks presenting an increasingly attractive alternative, why aren’t banks doing more to hold on to their customers? In short, it’s because they already have all the deposits they need thanks to skittish investors looking for alternatives to a volatile stock market.

“One of the problems in the system is too much liquidity because of excess deposits,” says Russell Price, senior economist for financial services firm Ameriprise. “And banks, on the other end, are not finding suitable candidates to make loans to.”

Price says that while the trend should reverse itself over the long term, consumers shouldn’t expect to see any significant changes during the next six to 12 months.