U.S. Banks Forced To Raise Rates On Deposits

US banks are being forced to do something they haven’t done for 15 years, Alexandra Harris, Caleb Mutua and Paige Smith reported for Bloomberg News, which is to fight for deposits by offering higher interest on deposits.

Photo Insert: More than a dozen US lenders including Capital One Financial Inc. are now offering an annual percentage yield of 5% on one-year CDs, a rate that would have been unspeakably high two years ago.

After years of earning next to nothing, depositors are discovering a trove of higher-yielding options like Treasury bills and money market funds as the Federal Reserve ratchets up benchmark interest rates.

The shift has been so pronounced that commercial bank deposits fell last year for the first time since 1948 as net withdrawals hit $278 billion, according to Federal Deposit Insurance Corp. (FDIC) data.

To stem the outflows, banks are finally starting to lift their own rates from rock-bottom levels, particularly on certificates of deposit, or CDs.

More than a dozen US lenders including Capital One Financial Inc. are now offering an annual percentage yield of 5% on one-year CDs, a rate that would have been unspeakably high two years ago.

Even the big banks are feeling the heat. At Wells Fargo & Co., 11-month CDs now pay 4%, Max Reyes also reported for Bloomberg News.

The jump in rates on CDs and other bank deposits has been a boon for consumers and businesses, but is a costly development for the US banking industry, which is bracing for a slowdown in lending and more writedowns, says Barclays Plc analyst Jason Goldberg.

And for smaller regional and community banks, losing deposits can be serious and weigh heavily on profitability.

“There are challenges ahead for banks,” Goldberg said. “Banks reflect the economy they operate in, and most forecasts call for slowing GDP growth and increasing unemployment.”

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