Shrinking Deposit Premiums Indicate A Low Demand for Loans

by tom 24. January 2011 18:14
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This week’s National Pricing Indicator report revealed that interest rate premiums, which are used to attract new deposit money, are shrinking relative to the base rate offered on deposits.

In the beginning of 2010, the average premium on deposits was almost double the base rate at 97 percent. By the end of 2010, the average premium shrank to 81 percent of the base rate offered on deposits (see Figure 1).

Among term accounts, the 48-month CD experienced imagethe biggest relative drop in premiums, plummeting from 82 bps in January of 2010 to 25 bps in December of 2010. The only increase in premium during 2010 was for the 60-month CD, which increased from an average of 77 bps in January to 79 bps in December of 2010 (see Figure 2).

Among the liquid accounts, checking accounts experienced the greatest decline in premiums relative to the base rate. The average premium on checking accounts dropped from 259 bps in January of 2010 to 73 bps in December of 2010. imagePremiums on money market accounts were the most stable. They dropped only 17 bps from 59 bps in January to 48 bps in December of 2010 (see Figure 3).

According to Dr. Dan Geller who compiled the research, there are two implications to be derived from these findings: 1) The supply of deposits well exceeds the demand for lending, and 2) The pressure on Net
Interest Margins is forcing banks and credit unions to reduce their most expensive rates.


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