Weekly Term Accounts APY Spread and Premium Index–January 30

by tom 30. January 2012 16:22

APY Spread Index
The APY spread is a simplified form of a standard deviation. It measures the variance between the high and low ends of the price range to the average, which indicates whether the APY of a particular CD is closer to the low or the high end of the pricing spectrum.

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Premium Index
Premiums are used as the main vehicle to drive balances towards the most desired deposit products, and are an indication of the capital strategy of each individual institution. This week’s highest and lowest national premiums:

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Weekly Term Accounts APY Spread and Premium Index–January 23

by tom 23. January 2012 15:08

American Banker and Market Rates Insight feature a weekly APY Spread and Premium indices to provide pricing executives with greater insight into national pricing trends and practices.

APY Spread Index

The APY spread is a simplified form of a standard deviation. It measures the variance between the high and low ends of the price range to the average, which indicates whether the APY of a particular CD is closer to the low or the high end of the pricing spectrum.

image

Premium Index

Premiums are used as the main vehicle to drive balances towards the most desired deposit products, and are an indication of the capital strategy of each individual institution. This week’s highest and lowest national premiums:

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Weekly Term Accounts APY Spread and Premium Index–January 16

by tom 17. January 2012 21:35

American Banker and Market Rates Insight feature a weekly APY Spread and Premium indices to provide pricing executives with greater insight into national pricing trends and practices.

APY Spread Index

The APY spread is a simplified form of a standard deviation. It measures the variance between the high and low ends of the price range to the average, which indicates whether the APY of a particular CD is closer to the low or the high end of the pricing spectrum.

image

Premium Index

Premiums are used as the main vehicle to drive balances towards the most desired deposit products, and are an indication of the capital strategy of each individual institution. This week’s highest and lowest national premiums:

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MRI Predicts that 2012 Will Be a Gray Swan Year–Part 3

by tom 12. January 2012 07:44

By Dr. Dan Geller, Executive Vice President

Every year, Dr. Dan Geller, Market Rates Insight’s chief analyst, provides a prediction of deposit trends for the coming year. We recently posted the second part of this year’s report. What follows is the third and final in a series of articles with this year’s forecast.

HOW LONG WILL “FREE INSURANCE” LAST ?

The announcement by the U.S. Federal Open Market Committee to keep the federal funds rate at a near zero level through mid-2013 supports the possibility that the mounting amount of cash accumulating in US bank deposits is eventually going to cause a cost reversal in interest on deposits because interest income from lending and interest expense from deposits are on a collision course. This means that loan rates
are going to decrease even further to stimulate lending, and deposit balances are going to increase due to economic and market uncertainty.

The first case of cost reversal in U.S. banking industry was amounted in August by the BNY Mellon, which is charging an interest rate of 0.13% on deposits of $50 million and over. However, the underlying reasons for the need to charge a premium for deposits is evident also on the retail side of banking and it won’t be long
before the threshold for “cost reversal” will go down to lower level of account balances.

This transformation is not by design and was not concocted in the boardroom of any bank; rather it was created by market forces responding to economic circumstances. The phenomenon of cost reversal
became evident during the last recession and has intensified ever since, as we warned last October.
Here are some of the factors that are creating the need for cost reversal on the consumer side and the banking side. First, the last U.S. recession and its lingering “recovery” created economic uncertainty among consumers and businesses. Naturally, in times of economic uncertainty, the normal reaction is to seek safety and security of the capital at hand rather than focus on potential returns.

This is exactly what happened with insured bank deposits during and since the last recession. Domestic deposits increased by over a trillion dollars since the official start of the recession in December of 2007 despite the fact that the average interest rate paid on these deposits decreased from 3.82% to 0.82% – a decrease of 300 basis points.

Second, the purpose of capital, mainly in the form of consumer deposits, is to lend. Yet with the soft lending market, the excess deposit capital is becoming very costly because it keeps on generating interest expenses and FDIC insurance expense regardless of the demand for loans. As long as the Net Interest Margin (NIM) can be profitably maintained, banks can sustain the excess expense.

However, at some point, when deposits continue to grow and the lending market remains soft, the burden of the excess expense will pull the NIM to an unprofitable level. Based on the latest FDIC data, the trend is headed in that direction. In the first quarter of 2011, interest income stood at 3.88% of assists compared to
4.20% a year earlier.

At the same time, interest expense in the first quarter of 2011 stood at 0.70% compared to 0.88% as a result of decreasing interest rates on deposits. If interest income will continue to decrease due to soft lending market, interest expense will have to be reduced even further; and with interest rates already exceptionally low, the only way to achieve that is with negative interest rates, which de facto is a cost reversal from the banks to the consumer.

Are U.S. consumers going to “accept” the new reality of paying for the safety and security of their deposits? Chances are they will – not because they want to but due to a lack of alternatives. Most other investment options, such as mutual funds, stocks, bonds and commodities, involve risk to the principle. So the question facing the public becomes: how much is it worth knowing that your principal is safe no matter what? So far the answer is 13 basis points, which is the interest rate the Bank of New York Mellon is charging.

SHRINKING RATE VARIANCE BETWEEN INTERNET & BRANCHES

Deposit-rate variance between Internet banks and brick and mortar banks (aka Branch banks) is shrinking. However, the shrinkage is not uniform across all deposit products, which indicates that there is a difference between the liquidity strategy and risk of Internet vs. Branch banks.

As of December 1st 2011, the national average APY for term accounts of Internet banks is only 4 bps higher than that of Branch banks. The highest variance is in 12-month CD, 16 bps, and the lowest variance is in 5-year CD, where the variance is negative 24 bps (Figure 5).

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The national average APY variance of liquid accounts is currently 41 bps, with MM commanding the highest variance at 71 bps, and checking the lowest with 10 bps (Figure 5).

In the last five years, the national average APY variance on term accounts dropped by 20 bps - from 0.24% to 0.04%. For liquid accounts, the national average APY variance dropped from 0.91% to 0.41% (Figures 5 & 6).

Implications:

• Internet banks are more price aggressive in liquid accounts, while branch banks are closing the APY gap of term accounts.
• Internet banks are more price aggressive in short-term CDs, while branch banks are more price aggressive in longer-term CDs.
• Internet banks are becoming more rate aggressive with checking accounts, which was not the case five years ago.

HOW TO PREPARE FOR UNCERTIANTY IN 2012

The only way to combat uncertainty is to be prepared and to increase focus in two main areas:

• Greater control over your interest expense
• Better management of your deposit balances

Control your interest expense:

Higher interest expense is caused primarily by product mispricing due to inability to identify various types of CDs (beyond term and tier) when establishing a rate. Mispricing occurs when a rate is established based on competitive information without the corresponding type of CD next to the APY. The APY variance between regular CD and other CD types, such as callable CD, can be as much as 39 bps. Thus, if a rate is set not knowing the type of the competing CD, an over pricing of up to 39 bps can occur.

Figure 7 is an analysis of APY differences between various types and regular CD.

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Manage your deposit balances

Your deposit balances are impacted more by the APY variance between you and your market average than your APY alone. This means that your APY variance controls most of your balance changes. Nationally, 55% of the changes in balances derive from changes in the APY variance (varies by market). Thus, your balances
may change even if you do not change your rates. For example, the APY variance of MM up to $10K impacts 84% of the changes in the balance of this product. You will be able to conduct variance analysis for each of your product and markets and anticipate impact on balance.

Figure 8 is an analysis of the impact of APY variance on balances of different products.

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MRI Predicts that 2012 Will Be a Gray Swan Year–Part 2

by tom 10. January 2012 18:56

By Dr. Dan Geller, Executive Vice President

Every year, Dr. Dan Geller, Market Rates Insight’s chief analyst, provides a prediction of deposit trends for the coming year. We recently posted the first part of this year’s report. What follows is the second in a series of articles with this year’s forecast.

In 2012, it will take more than just financial skills to understand and manage deposit rates and balances, it will require the use of macro economics, behavioral economics and understanding of risk based decision science.

The underlying reason for this transformation in the approach to deposits is the new economic reality since the beginning of the last recession in December of 2007. The last recession had a drastic impact on consumer behavior as a whole, but even more so on how they perceive and use deposits. In this publication, I will outline some of the major trends that have contributed to the new approach to insured deposits, and how these trends are likely to impact deposit rates and balances in 2012.

TRANSFORMATION OF DEPOSITS

Traditionally, deposits were a vehicle for gaining a steady and risk-free return. Therefore, the main criteria for choosing a deposit type was first and foremost the interest rate paid. However, all this changed since the beginning of the last recession in December of 2007, when the purpose of insured deposits changed from return on the money to return of the money. In other words, the assurance that the money deposited
is safe, and that it will not BE adversely impacted by the volatility of the equity market and the economic uncertainty, became the most attractive proposition for many consumers.image

This transformation is evident from the elasticity analysis showing that bank deposits are among the most inelastic commodity, even more than gasoline, which is highly inelastic due to its absolute necessity. The latest figures on deposit balances and APY indicate that long-term elasticity of deposits is 0.22 compared to 0.58 for gasoline. The closer the elasticity figure to 0.00, the less sensitive demand is to changes in price, or
APY in the case of deposits. Short term (1 year or less) elasticity for deposits is at par with gasoline, 0.28 and 0.26 respectively (Figure 3).

The reason deposits are more inelastic in the long term than gasoline is because there is no substitution to insured deposits.

Typically, demand is more sensitive to price changes in the log run because over time consumers change their behavior by either reducing consumption or finding a substitution. When gasoline prices go up and stay high for a long time, consumers tend to buy more fuel efficient cars (hybrid or electric), drive less and/or use more public transportation.

However, in the case of deposits, there is no substitution because there is no other way to ensure that the principle amount is 100% safe. All other options, such as equities, mutual funds, bonds and alike, carry some level of risk to the principle.

CONSUMER DECISION PROCESS

Rather, they will intuitively (intuitive decisions are basically recollection of past experiences from memory) make a decision if an APY is within the range of what they remember to be the “average”. In intuitive decision making, the average is considered the default baseline for evaluation. For example, if all you know is that the average height of people living in New York is 5.7”, and Mary lives in New York, how tall is Mary likely to be? Most people will default to the average – 5.7”.

On the other hand, larger amounts of deposits, such as $100K and over, triggers the help of system two for a more analytical approach because the risk factor is much larger. In such cases, many consumers will take the time to do research and compare APY and other features that are offered. However, the comparison of your APY is not so much to the market average, but more to the highest competitor that they can find in their research. This is the reason the APY variance to the market average on jumbo accounts is less important to the decision making process (Figure 4).

Of course, there are always regional variations due to demographic and psychographic differences in the makeup of the population in each market, which makes it even more critical to monitor your APY variance for each of your product and markets on a regular basis.

Under the umbrella of inelasticity of deposits, there are variations in how consumers choose deposits based on two consumer behavior theories:

1) The Theory of Risk-Based Decision Making.
2) The Theory of Cognitive Decision Making.

Consumer decisions on deposits fall under the risk-based decision theory not because there is a risk of losing the deposit (they know it’s insured), but because there is a risk of not gaining enough. For example, if the same CD is available in two different places at 1% APY and 2% APY, the decision carries a risk of not gaining 1%, which is the difference between the two options.

The theory of cognitive decision making states that people have two cognitive processes for decision making. The first is intuitive (aka system one), which is done fast and most often, and the second is analytical (aka system two), which is much slower and requires mental work. Generally speaking, people use system one for most of their daily and ordinary decisions such as what to have for dinner, and they use system two for decisions that require analytical effort such as which mortgage option to choose.

Overall, the lower the risk of the outcome, the more likely are people to use system one (intuitive process) to make a decision. These two behavioral theories play a major role in deposit decision making in the matter described below. Currently, interest rates on deposits are at record low. The national variance between the average APY and the highest APY of a 12 months CD (non jumbo) is about 81 bps. This means that the “risk” factor here amounts to $81 for $10,000. For many people, such low risk (of not gaining) is considered insignificant, and they are not very likely to conduct an extensive analysis because the time and effort required is greater than the risk.image

Rather, they will intuitively (intuitive decisions are basically recollection of past experiences from memory) make a decision if an APY is within the range of what they remember to be the “average”. In intuitive decision making, the average is considered the default baseline for evaluation. For example, if all you know is that the average height of people living in New York is 5.7”, and Mary lives in New York, how tall is Mary likely to be? Most people will default to the average – 5.7”.

On the other hand, larger amounts of deposits, such as $100K and over, triggers the help of system two for a more analytical approach because the risk factor is much larger. In such cases, many consumers will take the time to do research and compare APY and other features that are offered. However, the comparison of your APY is not so much to the market average, but more to the highest competitor that they can find in their research. This is the reason the APY variance to the market average on jumbo accounts is less important to the decision making process (Figure 4).

Of course, there are always regional variations due to demographic and psychographic differences
in the makeup of the population in each market, which makes it even more critical to monitor your
APY variance for each of your product and markets on a regular basis.

To be continued…

Weekly Term Accounts APY Spread and Premium Index–January 09

by tom 9. January 2012 17:05

American Banker and Market Rates Insight feature a weekly APY Spread and Premium indices to provide pricing executives with greater insight into national pricing trends and practices.

APY Spread Index

The APY spread is a simplified form of a standard deviation. It measures the variance between the high and low ends of the price range to the average, which indicates whether the APY of a particular CD is closer to the low or the high end of the pricing spectrum.

image

Premium Index

Premiums are used as the main vehicle to drive balances towards the most desired deposit products, and are an indication of the capital strategy of each individual institution. This week’s highest and lowest national premiums:

image

MRI Predicts that 2012 Will Be a Gray Swan Year

by tom 3. January 2012 16:43

By Dr. Dan Geller, Executive Vice President

Every year, Dr. Dan Geller, Market Rates Insight’s chief analyst, provides a prediction of deposit trends for the coming year. Attached is the first in a series of articles with this year’s forecast.

Expect 2012 to be a gray swan year; a year in which we know a risk is plausible, but we don’t know how it will impact the financial and banking industries. Unlike a black swan, which is a highly improbable and unknown risk, the gray swan of the banking industry is the financial faith of the European Union, which is made up of 27 member countries, especially the 17-member Eurozone countries. Although the U.S. exposure to the EU from a trade balance is only about $140 billion, the real risk is with the banking industry.

Continued turmoil in the Eurozone in 2012 is very likely to impact the financial and banking markets in the U.S. because of the interdependence of the global banking system and its reliance on the LIBOR (London Interbank Offered Rate), the world’s most widely used benchmark for short-term interest rates. LIBOR is the rate at which the world’s banks borrow money and is fixed on a daily basis by the British Bankers’ Association based on an average of interbank deposit rates for larger loans at the world’s most creditworthy banks.

One possibility is that money supply in the EU will tighten, causing the LIBOR to go up due to limited money supply. Higher LIBOR is very likely to impact borrowing interest rates in the US. because when banks borrow at a higher rate, they pass the increase in their borrowing cost to the consumer.

Another option is that LIBOR will decrease as a result of over liquidity due to increased money supply in order to stimulate the EU economy. Such a scenario is likely to put even greater pressure on net interest margins, causing deposit rates in the U.S. to go all the way to near zero.

Current indications are that the LIBOR is trending up as a result of the economic and financial status of the EU. The average LIBOR rate, which consists of the average of the 1, 3, 6 and 12 months rates, rose to 0.60% this November compared to 0.43% in April of this year - an increase of 40% in seven months. Historically, LIBOR rates and U.S. deposit rates have been highly correlated, which is the result of the inner dependability of the global financial world.

The instability of the EU financial system is a result of two main factors, one systematic and one cyclical. The systematic factor is the European sovereign debt crisis, which was caused by runaway government spending in some European countries. For example, Greece, Portugal and Italy all have elevated debt-to-GDP ratios, which when coupled with the second factor, the burst of the housing bubble in Europe, made it even harder for these countries to grow their economies.

Economic growth is a must in order to reduce and stabilize debt-to-GDP ratios, especially for countries like Italy, which has nearly €2 trillion in outstanding government debt. Moreover, Italy has slim growth prospects in the near term because it first needs to reform its labor market in order to increase productivity and become more competitive. Similarly, yet less drastic is the situation that exists in Spain, Greimageece, Portugal and Ireland.

Since “organic” economic growth is not very likely in the short term for these members of the EU, the only two options left are default on their government-issued bonds, or to receive financial assistance from the ECB (European Central Bank), to support the Italian government bond market until stronger economic growth begins to take place. Just to put things in prospective, Italy is the 8th largest economy in the world measured by GDP.

In addition to, or because of, the uncertainty caused by the financial events in the EU, we have another unknown in 2012 – the direction of deposits APY and balance. Yes, generally speaking, APY has been on the decline in the past four years, and deposit balances on the rise. But a look at the rate of increase and decrease indicates that the year-over-year variance has wide fluctuations, which makes yearly projections somewhat challenging.image

For example, the decrease in APY in 2011 was 36% less than in 2010, and conversely, the balance increase in 2011 was 300% greater than in 2010. Hence, it’s not just that we don’t know which way balances and APY are headed in 2012 due to the uncertainty of the financial crisis in the EU, we don’t even know the extent of the change once it occurs.

The best advice I have to offer is borrowed from Nassim Nicholas Taleb, the author of the Black Swan - when you can’t predict; be prepared. In other words, at this point we don’t know if the financial crisis in the EU will trigger a rate hike or push rates farther down. But, we can be prepared for both scenarios. The best
way to be prepared is to keep a close eye on deposit rates, and to develop two pricing scenarios; one for rate increase, and the other for rate decrease.

Weekly Term Accounts APY Spread and Premium Index–December 26

by tom 27. December 2011 19:58

American Banker and Market Rates Insight feature a weekly APY Spread and Premium indices to provide pricing executives with greater insight into national pricing trends and practices.

APY Spread Index

The APY spread is a simplified form of a standard deviation. It measures the variance between the high and low ends of the price range to the average, which indicates whether the APY of a particular CD is closer to the low or the high end of the pricing spectrum.

image

Premium Index

Premiums are used as the main vehicle to drive balances towards the most desired deposit products, and are an indication of the capital strategy of each individual institution. This week’s highest and lowest national premiums:

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Weekly Term Accounts APY Spread and Premium Index–December 19

by tom 19. December 2011 16:21

American Banker and Market Rates Insight feature a weekly APY Spread and Premium indices to provide pricing executives with greater insight into national pricing trends and practices.

APY Spread Index

The APY spread is a simplified form of a standard deviation. It measures the variance between the high and low ends of the price range to the average, which indicates whether the APY of a particular CD is closer to the low or the high end of the pricing spectrum.

image

Premium Index

Premiums are used as the main vehicle to drive balances towards the most desired deposit products, and are an indication of the capital strategy of each individual institution. This week’s highest and lowest national premiums:

image

Weekly Term Accounts APY Spread and Premium Index–December 12

by tom 12. December 2011 15:17

American Banker and Market Rates Insight feature a weekly APY Spread and Premium indices to provide pricing executives with greater insight into national pricing trends and practices.

APY Spread Index
The APY spread is a simplified form of a standard deviation. It measures the variance between the high and low ends of the price range to the average, which indicates whether the APY of a particular CD is closer to the low or the high end of the pricing spectrum.

Premium Index
Premiums are used as the main vehicle to drive balances towards the most desired deposit products, and are an indication of the capital strategy of each individual institution. This week’s highest and lowest national premiums:


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