Banks increase CD interest rates, the return on savings accounts after the SVB crisis
The Silicon Valley Bank crisis has hammered stocks and will almost certainly limit lending and economic growth this year. But that seems to translate into an advantage for consumers: Higher bank savings rates.
With some nervous depositors moving their money from regional banks to big ones, at least some banks are raising savings account and CD rates to incentivize customers to stay or attract new money to replenish reserves, analysts say.
“It’s likely that concerns about maintaining deposit levels have put upward pressure on some deposit rates at some banks,” said Ken Tumin, founder of DepositAccounts.com, which tracks bank savings and CD rates. Banks, he says, want to “support their deposits to reduce the chances of being hurt by a bank run.”[ads1];
Some online banks in particular have increased deposit rates because it is easier for their customers to move money to competitors, he says.
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Ally Bank raised the rate on its 11-month, penalty-free CD from 4% to 4.75% on Saturday, March 11, shortly after Silicon Valley Bank’s failure, Tumin says. The big jump and the weekend timing of the move were both unusual and may have been designed to “reduce deposit outflows from fearful customers,” he wrote on his website.
The higher rate means an extra $138 in interest over the 11-month period on a $20,000 deposit.
Ally Bank did not respond to an email seeking comment.
Instead of stemming the loss of funds, some banks may simply try to capture some of the deposits that ricochet through the banking system, an analyst says.
“I think the banks are opportunistic and see this … as a good opportunity to capture a customer relationship,” said Garry Zimmerman, founder of MaxMyInterest.com, a platform that allows consumers to move money between banks that pay the highest rates.
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Why did Silicon Valley Bank fail?
Silicon Valley Bank collapsed as concerns about its financial health prompted customers whose deposits were uninsured — because they topped the Federal Deposit Insurance Corp.’s $250,000 limit — to move their money to bigger banks with more stable assets. Banks depend on deposits to make loans.
A similar merger precipitated the demise of Signature Bank of New York, threatened First Republic Bank, and prompted many depositors across the country to reallocate their deposits. To contain the crisis and prevent another bank run, federal regulators have stepped in to help ensure uninsured depositors can access their money.
During the week that Silicon Valley and Signature failed, regional and smaller banks lost a record $119 billion in deposits while the 25 largest banks gained $67 billion in deposits, according to a JPMorgan analysis of Federal Reserve data released Friday.
The impact of the crisis on savings rates may be difficult to isolate because bank rates have already risen significantly over the past year as the Fed has raised its benchmark short-term rate by 4.75 percentage points to fight inflation – the boldest campaign since the early 1980s.
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Do the banks raise the interest on savings accounts?
While most brick-and-mortar banks with branches have raised savings rates only slightly to 0.35% because they are flush with deposits, online banks have been more aggressive. The average online savings rate is 3.52%, up from 0.49% a year ago, and the average online 1-year CD rate is 4.56%, up from 0.67% a year ago, according to DepositAccounts.com.
However, the pace of rate hikes accelerated after the Silicon Valley crisis first made headlines on March 8, Tumin says. The average online savings rate rose 22 basis points to 3.74% from March 1 to March 24, compared with increases of 4 basis points from January 1 to February 1, and 17 basis points from February 1 to March 1.
Still, the Fed has slowed rate hikes from half a percentage point in December to a quarter point each in early February and last week. It suggests that the recent surge in bank interest rate hikes is at least partly a byproduct of the Silicon Valley crisis and its ripple effects, says Tumin.
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Banks with savings accounts with higher returns
Although the increase in average interest rates is modest, some banks have pushed up interest rates more significantly.
Phoenix-based Western Alliance, a regional bank whose shares plunged in mid-March during the Silicon Valley fallout before recovering recently, raised the rate on its high-yield savings account three times from March 14 to March 22. The rate rose from 4.45% to 4.75%, according to DepositAccounts.com.
Western Alliance declined to comment.
MainStreet Bank of Fairfax, Virginia, introduced a 15-month, penalty-free CD with an interest rate of 5% on March 14, but the small bank had planned to roll out the product before the Silicon Valley crisis, says CEO Jeff Dick. He says the bank’s deposits have grown, rather than shrunk, in the wake of Silicon Valley’s troubles.
However, he added that MainStreet planned to offer the CD for only three weeks. With many customers moving deposits since the crisis, “We’re going to keep it out there now” for another week or two. “I definitely want more of a pillow.”
Some analysts do not see a connection between the banking crisis and higher savings or CD interest rates.
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“In an environment of rising interest rates, banks that have consistently paid competitive yields have repeatedly increased their payouts to remain competitive,” said Greg McBride, Bankrate.com financial analyst.
Some banks also reject the suggestion that the Silicon Valley crisis triggered higher interest rates.
On March 17, Citizens Access, the online unit of Citizens Bank of Providence, Rhode Island, raised its online savings rate from 3.75% to 4.25%, but bank officials say the move was planned before Silicon Valley’s troubles.
“We are always looking for ways to provide value, through innovative products and solutions, as well as trusted advice,” the company said in a statement.
