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Record Deposit Growth Depresses Savings Yields Amid Pandemic, Recession

Written by Devon Delfino | Published on 8/19/20


2020 has been a year for the history books. Contributing to that history, deposits at commercial banks have spiked since the start of the coronavirus crisis — amid a recession. Based on the basic principles of supply and demand, this steep increase in supply (for the banks) points to a drop in demand (from the banks). So what could that mean? Lower savings deposit yields. Here’s what our DepositAccounts researchers found when they analyzed commercial deposit changes since 1973 and how savings yields shifted during previous recessions.

Key takeaways

  • Commercial bank deposits grew by $2.4 trillion to $15.7 trillion — an increase of 17.7% — from January 2020 to July 2020. It’s the second-largest six-month increase on record, just behind the December 2019-to-June 2020 period.
  • Six-month CD yields fell 0.19 percentage points from January 2020 to July 2020. Because the average APY on 6-month CDs was 0.33% at the start of the COVID-19 crisis, rates can’t fall much more before reaching zero.
  • Recessions reliably depress APYs for savers. In the six months after the Great Recession began in December 2007, 6-month CD yields declined 1.76 percentage points. When looking at the six-month periods after the five most recent recessions before the current one, savings yields fell an average of 2.50 percentage points.
  • The 17.7% increase dwarfs other deposit surges. Not including the four six-month periods preceding July 2020, the next largest six-month increase in commercial bank deposits was from June 1977 to December 1977, an 8% increase.

Why commercial bank deposit growth spiked

Deposit growth has seen fairly steady year-over-year percentage increases from 2015 to 2019, rising anywhere from 3.1% to 6.4%. But the jump in the first half of 2020 has been quite substantial, rising by $2.4 trillion, or 17.7%.

The coronavirus pandemic brought with it a vast array of economic events — and consequences — that likely contributed to this spike:

  • A total of 159 million Economic Impact Payments — worth more than $267 billion — were issued to eligible Americans beginning in April.
  • More than 4.8 million Paycheck Protection Program loans — totaling more than $521 billion — were issued as of the end of June. Applications were accepted through Aug. 8, so the final loan amount will rise.
  • Americans are spending less, and those who are able could be future-proofing by putting money into savings. Many Americans are out of work amid the recession.

Of note, more than half of the deposits in 2020’s first quarter went to the four largest banks:

How coronavirus has affected CD, savings yields

Both 6-month CDs and savings accounts experienced decreases in yields starting in February. Six-month CD yields fell to 0.14% in July, while savings account yields inched closer to 0%.

Six-month CDs were hit especially hard, compared to savings accounts. For example, the average savings APY went from 0.09% in January to 0.06% in July, a decrease of 33%. On the other hand, 6-month CD rates fell by more than 50% in that same period.

“CDs generally had more room to fall,” explained Ken Tumin, founder of DepositAccounts. “It’s kind of like the perfect storm against savers in terms of interest rates. With the Fed cutting rates down to zero, banks making fewer loans and rising deposits, the conditions are encouraging banks to slash their rates.”

6-month CD yields after a recession begins

Six-month CD rates saw a sharp decrease from January to July 2020. And, historically, a decrease isn’t out of the question when a recession hits. For the purposes of our study, we mainly looked at the five most recent recessions, though you can see where things are headed during this one:

There’s been a decline in each six-month period following the onset of an economic recession. By comparison, yields haven’t been hit nearly as hard this time, though it’s worth noting that we’re still in the midst of the current recession — and rates were already very low before.

Six-month CD yields, for example, were at 0.33% in February, so a 4.75 percentage-point drop — like the one seen in 1980 (when rates started at 13.48%) — was never a possibility. And when the Great Recession hit in December 2007, yields were just above 5%, and the circumstances were quite different.

“There were a lot of liquidity concerns [in the Great Recession], meaning banks were worried about having enough deposits on hand,” Tumin said. “And that resulted in a short period where the deposit rate actually went up or held steady.”

That could help explain why, historically, yields didn’t decrease as much as they have following other recessions. There was some of this concern over deposit levels in March 2020, Tumin noted, but guarantees in the market quickly eased those worries, resulting in a decrease in yields that we’re seeing now. In other words, banks don’t feel threatened about losing deposits, so there isn’t an incentive to keep rates up.

How to save money during a recession

Diversify your income (if possible)

Recessions can mean layoffs, so it makes sense to try to diversify where your money is coming from to avoid a potential total loss. For those with full-time employment, looking for options that won’t take too much time or mental energy might make sense. It’s also worth checking if you can adapt any of your existing skills to a freelance-style job, though this can take longer to get into and require more energy.

Create (or increase) your emergency fund

Increasing your savings is a natural response to economic turmoil. “I think this year has made it clear the importance of an emergency fund,” Tumin said. “If you have one, you might want to think about how much you have in there and if it’s enough to cover you in the worst case, whether that’s six or 12 months’ living expenses.” The pandemic, though, has exposed gaps, as many don’t have six months’ worth of emergency expenses.

Consider low-risk investments for short-term goals

When the economy is on a downswing, it makes sense to take a more conservative approach to your money management. This is, at least, when it comes to the basics, like your emergency fund and short-term financial goals that you know you’ll need to access relatively soon. Some examples to consider, despite the decrease in yields, are CDs and savings accounts, as well as bonds.

Think about getting a recession-proof job

Another way to help combat potential earnings losses is searching for a job that tends to be safe during recessions. That means avoiding industries that rely on disposable income, such as luxury items or travel. For example, consider working in areas such as construction, public utilities or financial services. The medical field can also be a safe option, though, given the circumstances, it won’t be the right fit for many. Another aspect to consider is how much public contact is required and how easily an in-office job could be converted to a work-from-home situation.

Look into a high-yield checking account

Many checking accounts feature fee-free structures, while others focus on cash rewards (or both). But for those who plan on keeping their balances below $25,000, a high-yield checking account can be a solid option. It can, for example, give consumers the opportunity to score higher rates than they might see with a traditional savings account. For those with higher balances, however, there may be better-paying options.


Researchers analyzed Federal Reserve data to determine commercial deposit changes across six-month and annual periods from January 1973 to July 2020, as well as 6-month CD yields during and around periods of recession.

  |     |   Comment #1
Well this makes sense that people had more money to save since the new tax cuts kicked in, the unemployment rate was low and wages increased just prior to this pandemic. Then folks were locked up and unable to go anywhere and spend that money. Many probably also sold stocks and we all got stimulus checks and increased unemployment benefits.

This is also a good illustration of how being a contrarian investor can pay off. Back in March I started putting some of my savings back into the stock market near the lows while many were probably still selling and putting that cash into savings. I only wish I was brave enough to have done more since the market is already back to pre-covid levels.
  |     |   Comment #3
If we could predict the future, we would all be rich! I'm well into my retirement years, so I have most of my life savings in mid and long CDs with rates ranging from 3.25% to 4% and, until recently, also had several reward checking accounts. Last year, the interest I earned from them pushed me from the 12% to 22% tax bracket. So a large chunk of the interest I earned went to the IRS. That really ticked me off!
When a couple of my CDs matured earlier this year, I decided to use half of that money to tip toe into the stock market instead of reinvesting the funds into CDs in this low interest environment. I bought several ETFs from Vanguard between January and April, and I have already netted more than 15.55% in that short period of time, which does not include the quarterly dividends. And, unlike CD interest, I won't have to report my gain next year as income, until I sell the ETFs. Of course, I realize that there's a chance that I could lose money, but this is only a small portion of my savings. And the potential for gain is greater than what one would receive from a 3% CD that might materialize 2 to 3 years from now and which gets taxed at the full rate.
  |     |   Comment #5
@HarvF: lol It's not easy staying in the 12% tax bracket(married filing jointly). I'm right near the top income wise so I use a combination of deductions, Roth IRA's, HSA, 403b and stocks, ETF's ETN's etc. to try and stay in the 12%. As I'm sure you are aware Qualified dividends and long term capital gains are taxed at 0% in this bracket. The new QBI deduction(for REIT investors), foreign tax credit and increase in income threshold also helped. I know many people with 2 working incomes who on paper make more income than we do but after taxes we earn as much or more and spend less due to lower job expenses.
  |     |   Comment #23
I have VGNSX(Vanguard Real Estate Index Fund) in my HSA account. It has a 4% quarterly dividend yield at the moment which may interest you. My HSA only lets me invest in Vanguard funds and only a select few at that. This 4% was the highest yield in all the available funds. I picked up some shares around $15 after the covid-19 scare.
  |     |   Comment #4
HaveF with regard to part of your statement ""I won't have to report my gain next year as income, until I sell the ETFs. Of course"" so you might just be doing that though if some have their way an start not only taxing capital gains but your paper gain ea yr.
Sorry it's 3:30am here n having my 1st cup of coffee really cannot think of the word I was looking for but think you get jest of what I am saying.

And in response to this article all I can say is "Welcome to the party" where where you 10-12m ago your stating obvious an acting now like most is too late this is really more of a article for a newspaper reporting after the fact

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