By AnnaMaria Andriotis
Will the results of the Federal Reserve’s latest round of “stress tests” lead to lower rates for savers?
The Fed announced today that most big U.S. banks passed the tests, which are administered by regulators to determine whether banks have enough capital to withstand a steep downturn. Ally Financial, however, fell short of the capital requirements. The Fed also rejected the requests of three other firms – Citigroup, MetLife and SunTrust – to raise their dividends or expand buyback programs; they’ve been asked to resubmit their capital plans to the Fed.
To raise capital, analysts say the banks will likely turn to one of two strategies: lowering rates on deposit accounts, or making changes to their company stocks by shrinking dividends of issuing more shares.
Lowering rates would be the easiest strategy, says Dan Geller, executive vice president at Market Rates Insight, a financial analysis company. To begin with, rates have been dropping for years and another notch down might not turn away existing customers – especially if the current rate is still above the national average. Ally, for instance, pays 0.84% on its savings account, while the national average is about 0.34%.
Experts say the move would result in instant savings for banks. When banks pay higher rates on deposit accounts, they end up with lower net interest margins and potentially less capital. Recent data shows that banks have been cutting back on this expense. In 2011, banks collectively paid roughly $85 billion in interest to depositors, 20% below what they paid in 2010, according to Market Rates Insight.
The possibility of lower rates comes at an already challenging time for savers. The banking industry has been cutting rates over the past year: Rates on checking accounts average 0.1% compared to 0.4% a year ago, according to MRI. For consumers seeking principal protection, that’s left them with a small return that doesn’t keep up with inflation.
To be sure, some industry experts say the banks will keep rates steady in hopes of bringing in more deposits, and boosting capital reserves. “It would be more likely that these banks would cut dividends where applicable, than cut interest rates on deposit accounts,” says Richard Barrington, a senior financial analyst at MoneyRates.com, which tracks deposit accounts. Banks say they don’t have immediate plans to lower rates. Ally and MetLife said if their rates do drop it would be due to market conditions.