Friday, March 4, 2011

Why is My Saving Account Paying Me Such Low Interest?

While preparing my taxes I was gathering my interest 1099's from my bank. I noticed that I was getting a very low rate of interest on my savings account. I remember just a few years ago when I was receiving 4 % interest on a few CD's I had. Now, banks pay somewhere around 1% interest on a CD.

Why is my interest rate so low?

Banks take our deposits and lend the money out in the form of mortgages, car loans, and personal loans. Their gross profit is the difference between the loan rate and the rate they pay depositors on saving instruments. For many years this was a small amount on average. Today the margin is much larger. In 2007 a 12 month CD yield was 4%, now the best rate you can get is 1%. A Mortgage interest rate at that time was 5%. The bank's margins, were then less.

Since the financial crisis the Federal Reserve has set interest rates at nearly nothing. Banks are able to borrow the nearly free money and loan it out at 5% and higher. The banks are under no pressure to raise the rates they are paying depositors, because of the Federal Reserve policies of low interest.

The federal banking regulators say that doing this is a way of helping banks beef up their balance sheets. They want the banks to raise capital to cushion against losses. Bank's earnings are on the rise. The financial sector earned an average $3.39 a share in the fourth quarter of 2010 vs. $1.54 in the fourth quarter of 2009. In 2007, they were earning in the $10-per-share range. I believe for the foreseeable future we are going to enjoy many more years of 1% interest at our banks.

3 comments:

  1. At some point in the near future the Fed will stop manipulating interest rates downward and let them rise to their equilibrium point. Don't expect bank rates to rise quite as fast.

    ReplyDelete
  2. Don't forget banks got bailout money too! Good time to be a bank!

    ReplyDelete

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