When it comes to deposit rates, all states are not created equal. According to a recent article in American Banker (and our own research), deposit rates in some states, such as Louisiana, Texas, and Virginia, deposit rates are higher because the local economy is healthier.
According to our own Executive Vice President Dan Geller (from his interview with American Banker):
Banks that are operating in those states should focus on lending "because it's a sign there is an increase in economic activity," Geller says. Those banks must also monitor and stay competitive with deposit pricing "to make sure they are attracting the right amount of liquidity."
In the struggle to keep funding costs low, banks have been largely unwilling to pay up for deposits. Nationally, the average deposit rate hit an historical low of 0.35% in December, Geller says.
Louisiana had the highest average deposit rate in December, at 0.51%, compared to just 0.24% in Ohio, Geller says.
Economic health seems to have a major influence on deposit pricing. Average unemployment was 5.2% in December in the five states — Louisiana, Texas, Iowa, Nebraska and Virginia — with the highest deposit pricing. States with the lowest deposit rates — Ohio, West Virginia, Indiana, Michigan and New Hampshire — had an average unemployment rate of 7.4%.
"There's a link between the highest interest rates paid on deposits and state unemployment," Geller says. "These rates are clearly a reflection of economic activity."
Of course, there are outliers. In New Hampshire, for example, the unemployment rate is low at 5.7%, but deposit rates remain low as well at an average of 0.27%.
Other factors, such as the types of industries prevalent in each state, the number of small businesses, and the level of household income play a role in deposit rates as well. Another factor is the number of competing banks in the state. For example, the five states with the highest deposit rates average about 32,000 individuals per bank (customers and their families). The states with the lowest deposit rates average 49,000 per bank; they just don’t have the competition to encourage higher rates.
According to Market Rates Insight research, rates on deposits have leveled off in recent months, although rates on long-term CDs continue to decline slightly. Be sure to check in with our Research Store to learn more about how to get the latest information about deposit rates in your competitive markets.