Word: deposit
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Beleaguered financial institutions looking to shore up their funding are battling for your deposit dollars, driving interest rates on bank products abnormally high. At first glance, that's fantastic news for consumers who are finding CDs that yield 4% and money-market accounts that pay 3%. But the competition for money - which will surely intensify as new bank holding companies like Morgan Stanley, Goldman Sachs and American Express amp up efforts to attract deposits - is also squeezing banks' profit margins, further straining an already weak industry and stressing smaller banks, many of which didn't go hog wild making risky...
...lends at 4% - an entire percentage point has been stripped from the bank's ability to make money. More than half of all banks saw their net interest margin - a measure of profit - fall in the third quarter compared with a year ago, according to the Federal Deposit Insurance Corporation. "After you pay your stockholders and employees, maintain your capital ratio and fund your growth, it gets pretty tight," says Mike Menzies, president and CEO of Easton Bank & Trust in Easton, Md. (See pictures of the recession...
...leave," says Steve Andrews, president and CEO of the Bank of Alameda. The San Francisco Bay Area bank has been forced to keep rates artificially high, Andrews says, as one flailing competitor after another - IndyMac, Washington Mutual, Downey Savings & Loan - has pushed up rates in an attempt to attract deposits and stave off insolvency. "It's frustrating riding into work and hearing about [deposit rates] at 4%," says Andrews. "That's prime rate - there is no margin...
...more competition is on the horizon. In the past two months, Goldman Sachs, Morgan Stanley, Raymond James, GMAC, American Express and business financier CIT have all applied to convert into bank holding companies, partly in order to be able to get access to cheap funding through deposits. GE Capital, the finance arm of GE, is planning on doubling its deposit base, which it garners through broker-sold CDs, to $81 billion next year. Goldman Sachs is on track to open an online bank. Morgan Stanley, which already has $36 billion in deposits, is selling billions of dollars' worth...
...stop falling until foreclosure rates come down. On Thursday, Federal Reserve Chairman Ben Bernanke said that he thinks the government should do more to stop foreclosures. He named a number of possible programs, including a plan floated a few weeks ago by Sheila Bair, who heads the Federal Deposit Insurance Corporation, for the government to pay mortgage servicers $1,000 per modification and split the default risk in order to encourage them to lower the monthly loan payments of borrowers at risk of foreclosure...