In 2007, my ING Direct savings account carried a 4.50% APY. Today, that same account pays a mere 0.80% APY. So, there’s no question that it’s barely profitable to keep money in the bank. However, based on bank data on loan revenue and interest expenses, banks had the potential to offer better rates, but failed to do so.
According to Market Rates Insight, U.S. banks reported $198 billion in interest expenses from domestic consumer deposits in 2007 compared to $43 billion in 2011, while domestic loan revenue decreased from $506 billion to $371 trillion in that same time period.
Yet, banks eked out a $20 billion increase in profits (assuming domestic consumer deposits contributed only to domestic loans).
And, from 2007 to 2011, the number of domestic interest-bearing deposits rose from $4.7 trillion to $5.6 trillion, according to the FDIC. Therefore, the average APY on all consumer deposits was 4.21% in 2007 and 0.77% in 2011.
If the 2007 level of profit was maintained in 2011, U.S. banks had the potential to dole out $20 billion more in interest, which would have resulted in an average 1.13% APY. The difference may not be much — just $36 on a $10,000 balance — but tightfisted savers surely wouldn’t mind that extra cash.
However, the banking industry became a different beast over four years’ time — a period marked by the recession. A number of reasons could have contributed to the low interest rates offered by banks — it is difficult, if not impossible, to pinpoint a single cause.
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First, deposit rates tend to move in tandem with the federal funds rate. At the end of 2007, the fed rate was 4.25%. At the end of 2011, it was 0% – 0.25%. It is less expensive for banks to borrow funds from the Federal Reserve Bank than to attract deposits with better rates.
Then there was the tightened loan standards as lenders came under immense scrutiny for having approving loans to just about anyone in the years before the financial crisis. With less lending, there was less need for deposits, which in turn led to less of a need to offer high deposit rates to draw in such deposits.
Finally, there’s the simple nature of capitalism. All businesses, not just banks, are bound to the relentless desire to perform better than the prior quarter — no doubt to pretty up the balance sheet and please shareholders.
So, yes, you and I could have gotten a better return on deposits — but that has always been the case. As long as a bank recorded profits, you could have received a higher APY. Credit unions, on the other hand, return profits to its members, which is why they tend to offer more competitive rates than banks.
Currently, the Federal Reserve expects the next rate hike to occur sometime in late 2014 — roughly six years since the last rate change. The short-term outlook appears grim, which is why I’ve placed more focus on riskier investments. But that rate increase will come, and many more will come after that. I will see the day when my ING Direct savings account pays me 4.50% APY (or more) again.
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