Competition for Deposits Heats Up

CU360
February 18, 2009 | COMMENTS

In a scramble for deposits to counter loan losses, retail banking units of pressured finance companies are paying higher rates than larger rivals to lure depositors, reports Bloomberg.com.

AIG—the insurer bailed out by the U.S. government—and GMAC—the biggest lender to General Motors car dealers—are offering yields of more than 4% for one-year certificates of deposit (CDs). Bank of America —the largest U.S. bank—is paying 2.75%, according to its Web site.

The struggle to gain deposits is intensifying as companies gain retail-bank status and companies try to stay afloat during the severe credit crunch. American Express, Goldman Sachs Group, and Morgan Stanley, which have received Federal Reserve approval to become bank holding companies, may drive the market even higher by paying more to depositors, David Hendler, a credit analyst at CreditSights, tells Bloomberg.com.

“They are doing whatever they can do keep their business models afloat,” Hendler said. “Everyone has to keep up their rates, but I don't see how that helps the system.” GMAC pays among the highest CD rates nationally, according to Bankrate.com . GMAC had a net loss of $2.52 billion in the third quarter 2008.

Credit-card lender Advanta Corp. is paying rates on par with GMAC, as is Michigan 's Flagstar Bank, which lost $62 million in the third quarter, and Chicago 's Corus Bank, which reported a $128 million loss, according to the Financial Times . MetLife Bank, owned by the biggest U.S. life insurer, was paying 3.9% on CDs of $25,000 or more in mid-November.

“Competition for deposits is pretty fierce,” Joe Belew, president of the Consumer Bankers Association, tells Bloomberg.com. “You have a public that is extraordinarily spooked, from mom-and-pop investors to the international financial conglomerates. Everyone is guarding their positions.”

Higher rates close the spread between interest paid on deposits and how much is received in interest payments from loans. This “net interest margin” was flat or declined during the third quarter at 10 of the 20 biggest banks compared with a year earlier, according to the FDIC.