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Question on banks lending

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From: Howard Goldberg
Sent: Monday, April 12, 2010 9:31 PM
To: Hirsch, Paddy
Subject: Your White Board Explanations are great and fun….I have one question

Why did banks like Ally, BOA, Capital One, Amex offer high interest savings accounts (the end of last year around 1.5%) if they could borrow money from the Fed for next to nothing???

Their current rates (while not 1.5%) are still relatively high.

Thank you

Howard Goldberg

Hi Howard:

You ask a good question. Frankly, I can’t speak with any real authority on the motivations of the banks, but these guys are so big now they have to offer a wide variety of products in order to serve the largest segment of customers possible. So it makes sense to offer a “high interest rate” account to select customers for a number of reasons.

First, the banks need to shore up their liquidity positions as much as possible. ie, they need lots of cash in the bank.

Second, they are getting money from the Fed window, but that is usually quite short-term money. Regular deposits are often longer-term money, and therefore extremely valuable to the banks. So they’re happy to pay up a bit for it.

The truth is I don’t know much about these accounts, but my colleagues over at Marketplace Money recently looked into these things, and they often come with all sorts of strings attached, such as a minimum hold period The rates can change, too, so they may not be what they seem for as long as you might think. And, of course, if you infringe on the banks’ requirements for even a second, you can bet you’ll get smacked with a fat fee, leaving the bank a teeny bit richer, and you needing a drink.

Thanks for watching the Whiteboards!


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