The Wall Street Journal
By: Suzanne Kapner, Robin Sidel & Dan Fitzpatrick
August 9, 2011
Banks Cut Interest Rates on Deposits as Cash Flows In; Some Borrowing Costs Are Expected to Rise.
Cash-strapped Americans are bracing for a further squeeze following last week's downgrade of U.S. government debt, as interest rates on deposits continue to fall and some borrowing costs edge higher.
Consumers have already been struggling with high unemployment and elevated levels of personal debt incurred during a pre-recession spending binge. Now they are grappling with shrinking retirement accounts, as major stock indexes nose-dive and yields on U.S Treasurys touch new lows amid the market turmoil.
"People are going to feel less rich and that will make them hold back on spending, which would be a further blow to the economy," said Beth Ann Bovino, a senior U.S. economist at Standard & Poor's. On Friday, the firm lowered its rating of government debt one notch to AA-plus, the first time the U.S. has lost its top-ranked standing.
Consumers are already earning less on the money in their checking, savings and money-market funds as well as on certificates of deposit, because banks, flooded with cash in the market upheaval, continue to reduce rates as they have trouble finding profitable ways of investing the cash and are faced with higher regulatory costs.
Some consumers said they were already changing their spending and investing habits as a result of the debt downgrade and the continued uncertainty over the economy.
"My wife and I decided over the weekend that we've got to go on another high-alert spending freeze, because we don't know what the future holds," said Warren Hershkowitz, 39 years old, who owns a real-estate consulting firm in Manhattan.
Ryan Zagata, a 37-year-old software sales executive who lives in Brooklyn, N.Y., said he was reconsidering the amount of money he invests in mutual funds. "My wife and I talked about moving more of our money to cash. We are not there yet, but we will definitely slow down the amount we are investing each month."
Banks across the U.S. cut rates Friday on four- and five-year certificates of deposits, pushing them to historic lows, according to Market Rates Insight. Bank of America Corp., the nation's largest bank as measured by assets, lowered rates on four-year CDs by as much as 0.45 percentage point in certain states. J.P. Morgan Chase & Co. cut its long-term rates by a quarter percentage point earlier in the week.
The average deposit rate is 0.79%, compared with a high of 4.53% last seen in September 2006, Market Rates Insight said. Deposit rates are expected to fall further as the flight to the safety of federally insured bank accounts continues.
Since December 2007, domestic deposits have increased by $1.1 trillion and now total about $8.1 trillion. The larger a bank's deposits, the larger the total amount of interest it has to pay out and the greater the payments it has to make to regulators in order to insure those funds.
Bank of New York Mellon Corp. became the first financial firm last week to charge corporate clients a fee for holding large amounts of cash. Analysts said they didn't expect it to be the last.
"It's only a matter of time before banks lower rates even further or start charging to hold deposits," said Dan Geller, executive vice president of Market Rates Insight.
The higher deposit costs are especially painful to banks, because they are unable to offset them by making more loans. Both the volume of lending and the rates that banks charge borrowers have remained anemic since the recession, curtailing a major source of revenue.
Mr. Geller said the combination of higher deposit costs and lower loan revenue was unsustainable for banks and could lead to increased borrowing costs for consumers as financial firms try to boost revenue.
Auto-loan rates, which had been falling since the beginning of the year, have started to edge up in recent weeks, according to Bankrate.com. The average five-year loan for a new car now carries a rate of 5.6%, up from 5.43% in June.
Credit-card rates have largely remained unchanged since new rules took effect last year that restrict the fees and interest rates issuers can charge. The rules require issuers to give customers 45 days' notice of any rate increase and only apply the increase to future purchases.
Mortgage rates, which tend to trade in tandem with yields on 10-year government bonds, declined slightly on Monday as prices of U.S. Treasuries rallied, and remain near all-time lows.
But analysts said they expected financial firms to review their borrowing terms and potentially raise rates for the least credit-worthy borrowers in coming months.
Mike Moebs, who provides consulting services to banks, said he expected consumer borrowing costs to increase by a quarter to a half percentage point over the next six months.
"If Uncle Sam is riskier, so is everyone else," Greg McBride, a senior analyst with Bankrate.com, said.
Write to Robin Sidel at firstname.lastname@example.org and Dan Fitzpatrick at email@example.com