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Deposit Rates and Institution Size: What is the Correlation?

Deposit Rates and Institution Size: What is the Correlation?

The following post is from our analyst, Rodney, and is the first in a hopefully regular and ongoing series of articles that seek to take a deeper and more concerted look into what we can glean from our proprietary depository banking data set. Our patented technology is tracking approximately 275,000 rates and 190,000 attributes (e.g. fees, min/max, EWP, etc.) across approximately 175,000 depository products from 7,500 banks and credit unions. With this series, we hope to examine broader averages, trends, and correlations within that data set and to look at what we might be able to learn from those figures. Some of these articles might be less practically applicable than others, on an individual/personal level, for our most veteran rate chasers, but we hope that they can, at minimum, paint an informative picture of the broader deposits landscape and the various factors at play on a macro level....

No doubt one of the driving factors for choosing deposit products and the banks that offer them is the rates they proffer on their products. Consumers are left to muse over the wide variety of rates among financial institutions and the underlying root variables that drive those rates. The same curiosity that has driven them to ask questions has compelled us to delve into the numbers, as well.

In particular, we thought an interesting exercise would be to pinpoint the correlation between financial institution size and deposit rates. The general consensus is that larger banks offer lower rates overall, but we wanted to ascertain whether or not the numbers bear that out as true, and if so, to what extent. So, we turned to our own set of deposit rate data for answers.

The Details

The study compared the rates of four separate product categories with an initial deposit amount of one thousand dollars: Personal Savings & Money Market Accounts, Personal Checking Accounts, 1 Year CDs, and 5 Year CDs. Institution size was based on assets and considered in two different modes. First, the institutions were grouped generally as small, medium, or large, where ‘small’ is any institution with less than one billion dollars in total assets, ‘medium’ is any institution with assets between one billion and twenty-five billion dollars, and ‘large’ is any institution with greater than twenty-five billion dollars in assets.

Second, a more meticulous approach to the numbers divided the institutions into 16 categories by assets:

1. <>
9. $1-$2.5B
2. $50-$100MM
10. $2.5-$5B
3. $100-$200MM
11. $5-$10B
4. $200-$300MM
12. $10-$20B
5. $300-$400MM
13. $20-$50B
6. $400-$500MM
14. $50-$100B
7. $500-$750MM
15. $100B-$1T
8. $750MM-$1B
16. >$1T

The study included both banks and credit unions that have brick and mortar locations. In the interest of comparing apples to apples as much as is possible, internet-only banks were excluded from the research, as they tend to skew the numbers with their typically higher rates (look for more on internet bank rates in future articles).

The Results

The study did indeed produce some interesting results depicting the correlation of institution size and deposit rates. First, a cursory look at the results of the study of small, medium, and large institutions and their deposit rates. As you can see in the chart below, a trend emerges with each product. The higher rates–by a wide margin, percentage-wise–are found in the small and medium institutions. The larger institutions are uniformly a distant third.

Key Deposit Products - APY by Institution Size

Checking and Savings – A Closer Look

Though rates on checking and savings accounts are minimal, at best, even they exhibit the pattern. On average, institutions in the ‘large’ category offer rates of .05% and .07% for personal checking and personal savings accounts, respectively. Their counterparts in the ‘small’ and ‘medium’ categories, however, offer rates of .12% and .11% on checking, respectively, and .14% on savings.

Average APY by Institution Size - Personal Checking

Average APY by Institution Size - Personal Savings & MMA

While none of these are large enough numbers to create much in the way of earnings long term, they do demonstrate the trend that emerged throughout the data; namely, that larger institutions offer lower rates on average. With these particular products, the rates offered by the small- and medium-sized institutions were roughly 2x those of the large institutions. If that trend holds true on products with higher interest rates, then the propensity to affect long term earnings heightens.

A look at the detailed breakdown of the numbers on savings and checking shows the same trend across the more narrow categories, with a few outliers.

Average APY by Institution Size - Personal Checking & Savings/MMA

As you move your eyes from left to right across the chart and the institution size increases, a steady decline can be seen as you scan over into the largest size categories—again, with an outlier or two—and a dramatic drop-off is seen in the largest institution category of more than $1T in assets.

1 Year and 5 Year CDs – A Closer Look

More interesting than the checking and savings number, however, are the larger rates offered on CDs. For sake of clarity and recognizing a pattern, we will look at each of these products charted individually. First, the 1 Year CD. You will note a nearly identical rate for small and medium institutions of .42% and .43%, respectively. The average rate offered by large institutions is barely more than half of those rates, coming in at .23%.

Average APY by Institution Size - 1 Year CD

The rates on 5 Year CDs are higher, but the pattern is very similar. Look familiar?

Average APY by Institution Size - 5 Year CD

Small and medium institutions offer average rates of 1.36% and 1.44% on 5 Year CDs, respectively, while large institutions offer a relatively measly .80% on average. Here again, the rates offered by the larger institutions are just over half of those offered by the small and medium institutions. A similar pattern also emerges when you look at the more detailed categorical breakdown.

Average APY by Institution Size - 1 and 5 Year CD

Apart from a couple of outliers, a decline begins to emerge with the large-sized institutions, and the rates drop off sharply with the largest institution category. The trend holds true across the board: larger banks are simply not competitive with small- and medium-sized banks when it comes to deposit rates.

The Outliers

After compiling all of the data on average APYs by institution size, we also wanted to explore those rates that would be of the most interest to our users – namely, the top-end outlier rates. Therefore, we dug in further to see where those outliers could be found by searching for the best individual rates on each product. We pulled the top 20 rates for each one and grouped them according to the same three categories used above.

The results were fascinating, and communicate a stark reality about where the best rates can be found. The following scatter chart shows the dispersion of the Top 20 rates on 1 Year CDs among the small, medium, and large categories.

Top 20 Highest APYs 1 Year CD

Of note is the fact that none of the Top 20 rates are from banks or credit unions in the large category, a pattern that was true of all four deposit product types we looked at. In fact, of the top 20 rates for 1 Year CDs, 5 Year CDs, and personal checking accounts, 18 of them came from banks and credit unions in the small category (less than $1B in assets) for each product. The remaining 2 top rates in each category came from the lower end of the medium category. The number was a bit different for savings accounts but still notable at 15 out of 20 from the small category and 5 out of 20 from medium. Equally as notable, the data showed that nearly half (8 of 20) of the top 20 rates on 1 Year CDs came from the smallest slice of institutions–those with less than $50M in assets.

(Note from Ken: If you’re interested in these high-rate 1-year CDs, please note that these may not be available in your state. Also, many of these small institutions are credit unions that have narrow fields of membership. You can see what’s available to you by using our 1-year CD rate table.)

The Application

While this study was borne more out of intellectual curiosity around average banking rates data than a likelihood of practical application for our rate-savvy audience, a few things can be gleaned from this study that might prove helpful in the process of future searches.

First, simply recognize that large institutions offer the lowest average rates on depository products and very rarely even produce an individual outlier rate. While bigger might be better in some aspects of your banking experience (e.g. online banking tools, ATM availability, etc.), it is not better when it comes to rates. Second, some very good opportunities for higher returns exist among the smaller institutions, so don’t count out the smaller banks and credit unions simply because of their size. There are some higher-rate gems out there waiting to be mined, and the numbers show that they are more likely to be found among the smaller banks and credit unions than among the larger ones. Because some of these are so small, if you’re not looking on DepositAccounts’ rate tables, you might have trouble finding them!

Finally, keep in mind that rates on some of these products are variable and change at the institutions’ volition. Following the pattern revealed by the data, then, long-term stability in high outlier rates may not be something a depositor should expect out of banks that are rapidly growing toward the large category. The wise consumer may do well to stick to the small- and medium-sized banks for higher rates with longer-term staying power.

(Note from Ken: What is your experience with deposit rates and bank size? Have you seen deposit rates drop after your bank was acquired by a large bank? Any differences with credit unions? Your comments are very much appreciated!)

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thowellIII   |     |   Comment #1
Nice analysis. The finding about the largest institutions is telling (although in that segment, I suspect that the internet-only banks are more likely segmenting the market a bit. Another interpretation of part of the data (the 20 highest APY chart): There are also a larger number of smaller institutions, so the chance that one of these institutions will offer a one-time special (e.g., an anniversary special) at any given point of time is higher. 
Ken Tumin
Ken Tumin   |     |   Comment #8
Thanks for the comments. Just to clarify, in this analysis we excluded internet-only banks. We will look into a future analysis covering these in the future.
Ricochet   |     |   Comment #2
Just using 1 and 5 yr rates doesn't really tell the story.
The one-time special and the odd month CD's smaller institutions offer
are the ones We all jump on.
The Odd months CD's are usually the best rate offers.
I don't see why they have the Odd ones,
other than to lessen  Raise Your Rate commitments
or similar offers, and rate comparisons .
cumulus   |     |   Comment #3
Great addition; the best keeps getting better.  Thank you.
lou   |     |   Comment #4
Break up the mega banks. Why do we have anti-trust laws if we never enforce them. We are close to achieving anti-consumer monopoly control of the banking sector by 5 banks that have assets greater than most countries in the world. It's ridiculous.
Anonymous   |     |   Comment #5
Good job of analysis here, Ken.  Thanks.

The large banks exist not to serve us;  they exist instead to steal from us.  And they are very good at what they do.
gregk   |     |   Comment #6
When a willing customer borrows or deposits voluntarily under no irresistible pressure or false pretenses, it may be due to laziness, gullibility, or stupidity, - but it's not theft.

There are ALWAYS alternatives.
Anonymous   |     |   Comment #11
Agreed.  But that's not what I had in mind.  Were you alive back in 2007 through 2009?  Banks were bailed out with our money, rather than permitted to pay for their bad decisions through bankruptcy.  I call that unvarnished theft . . albeit abetted by an eager and willing US government.

Word on the street is the big banks learned nothing from that experience.  They continue today living large on our dime, or rather with the assurance our dimes will once again be there to bail them out if things go sour.  If the word "theft" does not work for you, try "scam".