Weekly Term Accounts APY Spread and Premium Index–March 5

by tom 6. March 2012 12:27

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.

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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–February 27

by tom 27. February 2012 14:58

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.

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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–February 20

by tom 21. February 2012 20:23

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.

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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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The Case for Regional Deposit Pricing

by tom 15. February 2012 16:40

Dr. Dan Geller, Executive Vice President of Market Rates Insight and head of our research and analytics department, contributed the attached article to BAI Banking Strategies this week.

Institutions that are not practicing regional pricing are very likely mispricing their deposits, even in a low-rate environment.

imageWhen it comes to deposit pricing, the U.S. market is far from homogenous. An analysis of the average deposit rates in the 50 states and District of Columbia during 2011 shows that the spectrum of change in rates among the states ranges from -35 to +9 basis points (bps) for a total range of 44 bps. Such a large range is a clear indication that deposit pricing should be regionalized to avoid over- or under-pricing.

There are numerous ways to look at rate changes, each providing a different perspective of the magnitude of change and the implications these changes might have on future pricing decisions. One way is to measure the absolute increase in the rates, which indicates the highest increases and decreases in basis points, but does not reflect the value of the change relative to the base rate. Another way is to measure the relative value of the increase or decrease, but not necessarily the highest or lowest increase in basis points. Finally, you can measure rate changes by reflecting the highest and lowest end value, i.e., identify the states with the highest and lowest average rate at the end of December 2011.

On one side of the deposit-rate spectrum is Massachusetts, which dropped 35 basis points, from 0.81% in January to 0.46% in December of 2011. At the other extreme, the average rate for deposits in Alaska increased by nine basis points during 2011, from 0.35% in January to 0.44% in December. The absolute spectrum of rate changes is therefore 44 bps.

Completing the list of the leading five states with the greatest drop in rates during 2011, behind Massachusetts, are: Ohio down 34 bps; District of Colombia, 32 bps; Connecticut, 31 bps; and Rhode Island, 30 bps. The five states that exhibited the smallest drop in deposit rates after Alaska are: Kentucky, with a drop of 8 basis points; Nebraska, down 9 bps; Utah, 13 bps; and Maine, 14 bps.

When measuring the relative change in deposit-rate value by state, the picture is slightly different. Topping the list of the highest declines in deposit-rate value is South Carolina, which lost over half the value of its deposit rate in 2011 – down 52% from 0.58% in January to 0.28% in December. On the other side of the spectrum is, again, Alaska, which increased the relative value of its deposit rate by 27% – from 0.35% in January to 0.44% in December.

The remaining states in the top five with the greatest loss of deposit-rate value after South Carolina are: Ohio, with a 51% drop; District of Colombia, with a 49% drop; West Virginia, down 48%; and Connecticut, 45%. Conversely, states in the top five with the least loss of deposit-rate value after Alaska are: Nebraska, down 14%; Kentucky, 15%; Iowa, 19%; and Arizona, 20%.

At year end 2011, the following states offered the highest average rate on deposits: Iowa, 0.80%; Louisiana, 0.62%; Florida, 0.60%; Wisconsin, 0.60%; and California, 0.59%. The five states with the lowest average rate on deposits were: South Carolina, 0.28%; West Virginia, 0.32%; Montana, 0.32%; District of Colombia, 0.32%; and Ohio, 0.33%. For reference, the national average rate for deposits at year end stood at 0.58%.

Bottom line, deposit rates are dynamic, even in a low-rate environment, especially when the rates are subject to regional factors such as demographics, unemployment and supply and demand. Therefore, those bankers who practice regional rate optimization have the advantage of greater pricing precision, which translates into lower cost of funds.

Weekly Term Accounts APY Spread and Premium Index–February 13

by tom 13. February 2012 16:55

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.

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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–February 6

by tom 7. February 2012 13:22

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 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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