Banks Boosting Rates on Deposits to Combat the Fall in Deposits

BoroPark24 Staff

A fall in banking deposits has caused a costly development for the US banking industry.

According to Federal Deposit Insurance Corp. data, commercial bank deposits fell last year for the first time since 1948 as net withdrawals hit $278 billion.

According to Bloomberg, depositors have been turning to "higher-yielding options like Treasury bills and money market funds as the Federal Reserve ratchets up benchmark interest rates."

As a result, banks are being forced to raise their rates, specifically on certificates of deposit or CDs. CDs are popular because they generally offer the highest rates; however, they lock up funding for a set time, unlike checking or savings accounts. 

Bloomberg reports that more than a dozen US lenders, including Capital One, are now offering an annual percentage yield of 5% on CDs maturing in around a year. Now, at Wells Fargo & Co., 11-month CDs pay 4%. These are rates that would have been unheard of two years ago.

"There are challenges ahead for banks," says Barclays Plc analyst Jason Goldberg. "Banks reflect the economy they operate in, and most forecasts call for slowing GDP growth and increasing unemployment."