Abstract: Attempts by the government to jumpstart the economy by lowering interest rates this past winter had some discernable effects on the retail banking industry-not always in the intended ways. So far, low rates appear to have had little effect on consumer confidence. Neither have low interest rates on loans provided much incentive for consumers to take on additional debt, particularly those trying hard to work off debt built up in the past. Consumers are ignoring the usual seductions and pleas to borrow and spend and are behaving more rationally, observed John Medlin, CEO of Wachovia Corp., in a recent speech. Furthermore, many depositors are having to find more lucrative-or at least more liquid-investments for their savings than certificates of deposit, which in some cases means embracing risk/reward dynamics their CDs were immune from. Liquid assets. Bank customers moved over $20/billion from maturing CDs into savings and interest-bearing checking accounts in January alone, according to the Federal Reserve. Interest rates on the latter two types of accounts are often no higher, or even lower, than the 4% to 5% that many long-term CDs now pay. But retail customers want to stay liquid just now while they shop for better performing investments such as mutual funds, annuities, or Treasuries. While money has been pouring into mutual fund coffers in record amounts, many retail bank customers have been content to leave their savings where they are-in federally insured accounts earning temporarily unattractive rates. This more conservative group isn't likely to move money out of the bank under any condition, save the threat of a failure. As of the beginning of the year, the stay-put depositors appeared to be the more dominant group of the two. Three fifths of a group of 61 community bankers surveyed by ABA Banking Journal in January reported no runoff in deposits due to low interest rates. But 40% of the respondents did see a deposit runoff-as much as 15% of core deposits in the case of one California bank. The phenomenon affected more banks on the West Coast than other regions of the country, and time not surprisingly, were hardest hit. Sometimes the runoff encouraged. We have a $7 million portfolio of very high-cost IRA accounts, which we decided to price nonaggressively, says Thomas State, president of Peninsula Bank of Commerce, in Millbrae, Calif. early January, we had a substantial but expected runoff of those deposits. At the same time, says State, the bank saw a substantial gain in demand deposit accounts, but not in the number of new accounts. That said to me that our current customers were building up a cache of funds they were going to decide what to do with, because the funds weren't going into CDs, he says. Closed-account reports the bank produces indicate that CDs are expiring, and the funds are moving into interest-bearing checking accounts and money market savings accounts. The bank had about $88 million in assets in mid-February, down $3 million from December 1991. I anticipate we'll drop below $85 million, says State. Deep discount. In February, State deciding whether to run off more deposits because of weak loan demand. But a more pressing concern whether the Federal Reserve would lower the discount rate yet again. Our bank is very successful at linking our loan rates to the prime ;rate, he says. About 82% of our loans are tied to the prime rate, and every time it ops half of one percent, it costs us $20,000 to $21,000 in income. The December drop in the discount rate to 3.5% and the prime to 6.5%, says State, was disastrous for our January numbers. If the Fed reduces the rate again, it will drown some small banks. The wider range of product choices offered by most larger banks helps them weather such turbulence. We're not seeing a noticeable runoff in deposits, despite flat loan demand, says Diana Knox, senior vice-president and manager of consumer deposit products at U. …
Publication Year: 1992
Publication Date: 1992-04-01
Language: en
Type: article
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