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Health Rating and APY: What is the Correlation?

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The following post is from our analyst, Rodney, and is the second in a 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....

If you are not concerned about the financial health of your bank or credit union, you should be. These words can be found on the DepositAccounts bank health ratings page, and they are the reason that our proprietary health ratings are integrated throughout the site’s bank and product listings. History testifies to the fact that the health of financial institutions should be of interest to depositors. Understanding the health of their selected (and prospective) institutions can save depositors, at minimum, the many inconveniences related to having money in failed or failing banks.

The purpose of the health ratings has always been to assist depositors in gauging the health of their financial institutions precisely for these reasons. Apart from that role, however, our curiosity led us to examine whether or not these health ratings might correlate to other factors related to deposit products, like interest rates, for example. So, we dug into the numbers to understand the correlation, if any, between a financial institution’s health and the APY of its deposit products.

The Details

The research employed similar criterion as a previous project, focusing on the rates of four of the main deposit 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. The health ratings used for this analysis are the same health ratings found on the individual bank and credit union hub pages and are broken down into the nine ratings: A+, A, B+, B, C+, C, C-, D, and F.

The Results

Our research yielded some interesting, though maybe unexpected, results. We uncovered two inverse trends relating institution health to APY depending on the product type. Specifically, we found that institutions with lower health ratings averaged higher rates on liquid accounts (checking and savings accounts), while institutions with higher health ratings averaged higher rates on CDs. The following chart shows the difference in the top tier (A+ and A) rated institutions versus their lower tier counterparts (C+ and lower).

This chart depicts the difference in average APYs between the healthiest institutions (A+ and A-rated institutions) and the least healthy institutions (C, D, and F-rated). Positive numbers on the chart denote a higher average for the A-rated banks for that product category while negative numbers denote a higher average for the C and lower-rated institutions:

Difference in APY between A-Rated Institutions and C/D/F-Rated Institutions By Product Category

As you can see, the rate differences for the healthiest institutions are significantly in the positive for CDs but noticeably in the negative for Personal Checking and Savings/MMA accounts. Breaking the results out by product reveals the unexpected patterns a bit more clearly. Here are the average APYs by individual health tier for each of the CD terms. Excluding the low sample size F and D tiers, note the steady, incremental increase as you move along the chart toward the higher tiers.

Average APY by Health Rating - 1 Year CD Average APY by Health Rating - 5 Year CD

Whereas these results give a clear picture of the upward trend in rates in healthier institutions for CDs, breaking the results of the liquid accounts into nine categories produces a bit choppier results. However, as previously noted, the reverse trend of lower-rated institutions having higher rates than the healthier institutions is still evident when institutions are grouped into larger general categories of A, B, and C-and-below.

Average APY by Health Rating - Personal Savings/MMA Average APY by Health Rating - Personal Checking

Several factors could be contributing to this pattern. The most significant is likely that the healthier institutions are generally growing and generating more loan activity, requiring them to attract more deposits. With liquid account rates being so low, banks and credit unions have to depend more on CDs these days than liquid accounts to bring in new deposits. [For example, a bank that raises its money market account rate from 0.10% to 0.15% will probably not attract a significant addition of deposits]. CDs are more likely to be used in today's rate environment to attract deposits, and that requires the healthy, growing bank or credit union to offer higher CD rates.

Predictive Possibilities?

While pondering the correlation between health and APY, we also wondered about a possible predictive element to our health rating as it pertains to future APY moves. Do institutions of a certain health profile tend to experience different APY changes, over time, than those of another health profile? If so, this correlation could be yet another reason to factor in an institution’s health rating when selecting its products.

More Details

Do institutions of a certain health profile tend to experience different APY changes, over time, than those of another health profile?

For this part of the research, we looked back at products that existed continuously in our database from a past period through today. We then compared those products—considering their health and APY in that year—against their current rates to see if and how their health affected APY changes over time.

For instance, using the same criterion as we did in the first part of the research, we pulled the numbers from November 2013, including institution health and APY on the 4 types of products, and compared them to the current rates on those same products today. We picked 2013 (i.e. two years prior) as a midpoint historical period to compare against with the idea that two years gives enough time to really see the effects of health on an institution, but it is not so long that many of the products and institutions (and their health) have totally changed profiles. (We also pulled the same information for 2011, 2012, and 2014 in order to see if the same trends emerged. The results from the other years were not as clear cut in all cases, but similar trends existed on the whole).

An Emerging Trend

For this exercise, we divided the institutions into three categories, as above: top tier (A-rated), middle tier (B-rated), and lower tier (C-rated and lower). We then measured an average of the APY change for each category and each product type. The results show that over the last two years, the top- and middle-tier rated institutions experienced more favorable APY changes to their products, on average, versus the bottom-tier institutions across each of the four product types.

Rise in Rates on 1 Yr CDs by Health Rating: Nov. 2013-Present Rise in Rates on 5 Yr CDs by Health Rating: Nov.2013-Present Drop in Rates on Personal Checking Accounts by Health Rating: Nov. 2013-Present Drop in Rates on Personal Savings/MMA Accounts by Health Rating: Nov. 2013-Present

The Application

As for the predictive nature of institution health ratings, the application is pretty clear. *If* trends from recent history hold true, over time, the interest rates of products from healthier institutions could be expected to move more favorably than those from less healthy institutions. This finding adds even more weight to the opening statement of this article and adds yet another reason why, all other things being equal, if you want healthier products with a brighter long-term outlook, you should choose products from healthy banks.

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Ryan (anonymous)   |     |   Comment #1
I think the research is fascinating.  Massively interesting that "healthier" institutions tend to pay higher rates on long term products such as CD's.  I would have simply assumed that unhealthy financial concerns would pay higher rates across the board due to their extreme need to obtain an influx of cash.

I love this site!
ChrisCD   |     |   Comment #2
Unhealthy banks may tend to pay higher rates on the short-term because they are hoping the influx of deposits will solve their problem without paying a higher premium over the long-haul. 
Anonymous   |     |   Comment #3
FDIC monitors the rates and does not allow "higher rates" to solve problems...need subordinated capital that is not subject to being "moved" which would cause more problems if there is a "hiccup."