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Why Are Savings Account Rates So Low?

Thursday, July 14, 2011 - 7:48 PM
From The Simple Dollar
When I first started The Simple Dollar in late 2006, it was pretty easy to find a savings account that offered a 4% annual return on your deposits. Some banks, such as HSBC Direct, were offering introductory rates as high as 6% annually.

In other words, if you deposited $1,000 into an account at HSBC Direct at that time, it paid you $5 a month.

Rates like these were competitive with the long term returns one might expect from the stock market. It actually made good sense from a long-term investment standpoint to have at least some of your money in savings. Savings accounts are incredibly liquid, virtually risk free, and they were getting 4-6% annual returns? That’s a pretty good investment choice right there.

Today, you’re extremely hard-pressed to find a savings account that offers better than 1.5%. Some banks offer higher rates, but they’re tied to specific savings requirements, minimum balances, usage requirements, and other factors.

What happened? Why did savings accounts go from having very nice returns to having tiny returns? And will those higher rates ever return?

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WhataBummerWhataBummer413 posts since
Oct 15, 2010
Rep Points: 1,702
1. Friday, July 15, 2011 - 4:27 AM
loulou552 posts since
Aug 3, 2010
Rep Points: 3,431
2. Friday, July 15, 2011 - 5:26 AM
The management of a major credit union provided a useful explanation to members about how it set deposit rates and why rates were going down. I did a review of this explanation in this January blog post.

Low demand for loans and low Treasury yields were noted to be reasons for the declining deposit rates. Here's an excerpt:
Because our members have more deposits with us than loans, every new dollar deposited in PFFCU is currently added to our investment portfolio. We are very conservative in our investments, choosing only those investments that have a government guarantee. These guaranteed investments are currently only earning between 0.25% and 1.0%.

Ken TuminKen Tumin5,472 posts since
Nov 29, 2009
Rep Points: 125,708
3. Friday, July 15, 2011 - 9:13 AM
Like Ken said, the banks/cc look at the ovreall picture (Loan, investement return, etc., ...).  I would add four more factors: 

Certainly, the credit card business is no longer as profitable as before. 

The interest rate climate (i.e., rates most banks are offering) enforces an extremely low interest rate environment.

Government (e.g., Federal Reserve) is certainly not helping this situation, either. 

Lastly, but not least, banks/cc see the opportunity for higher profit markgins to push for lower interest rates, since the (dumb and dumber) depositors keep coming as they reduce rate to near-zero. 
51hh51hh1,476 posts since
Jan 16, 2010
Rep Points: 6,427