Caution Prevails as Cap on Savings Rate Nears End
NEW YORK -- While most banks and thrifts are adopting a defensive wait-and-see attitude toward the April 1 elimination of the interest rate ceiling on regular savings accounts, others already have begun offering new products aimed at replacing passbook and statement savings.
Since the first of the year, the number of institutions offering short-term certificates of deposits, passbook money market deposit accounts, and tiered interest-bearing checking accounts has steadily grown. Still other institutions have decided to enhance their regular savings accounts with noninterest incentives and premiums.
But no matter which strategy they've chosen, banks and thrifts across the country have a common goal: avoiding an interest rate war.
"Banks are acting with caution," said Edward Furash, president of Furash & Co., a Washington-based consulting firm. "There's lots of concern about disturbing the sleeping giant."
And that giant's dimensions are impressive. Surveys indicate that about 76% of Americans have a least one regular savings account. Although the total amount held in these accounts has steadily declined over the past three years, there is still some $300 billlion in about 86 million regular savings accounts. With the end of the 5.5% interest rate ceiling on April 1, bankers and thrift executives are keeping their fingers crossed that millions of customers will not suddenly demand market rates.
"Most banks that have regular savings don't want to compete, and thrifts don't want to pay market rates" on these accounts, explained L. Biff Motley senior vice president and director of marketing at Louisiana Bancshares Inc., Baton Rouge. Mr. Motley formerly was president of the Financial Products Group Inc., a Chicago consulting firm.
"Most banks are willing to lose some regular deposits rather than raise rates," Mr. Motley said. A typical bank with 10% of deposits in regular savings might be able to steal some market share by raising rates, he said. But the danger in doing so is the cannibalization of its existing low-cost deposits.
Consequently, consultants and analysts say raising passbook rates will be an infrequent phenomenon.
"A few banks will go, but I doubt if we'll see widespread repositioning," said Mr. Furash, who believes most institutions will offer new versions of other products to rate-sensitive depositors rather than raise their regular savings rate.
"The importance of the deregulation will be spotty and is not likely to be earth-shattering," agreed Henry S. Peltz, a thrift analyst with Keefe, Bruyette & Woods Inc. "The impact will vary by region."
A Question of Importance
How thrifts react will depend on how important these funds are to that particular thrift, he added. "Those that have more in these will move to protect them," Mr. Peltz said, "and those with less may take more vigorous action."
The same is likely to be true for banks. Mr. Motley expects small banks that have relatively small amounts in these accounts to be more aggressive.
"They have nothing to lose. They may as well steal some money," he said, adding that there may be some "isolated cases of predatory pricing." These aggressive pricers likely will be small banks in big markets. Mr. Motley believes that, in today's rate environment, institutions would have to offer at least 7% to induce a significant number of consumers to move their accounts.
Mr. Motley said he would not be surprised if a Florida bank or thrift offered 8% on a passbook account. "This would work if it were positioned and marketed correctly," he said. In order to appeal to the senior citizens in that state, the account would have to have traditional posting features and the institution would need an office in a shopping center or other convenient spot, Mr. …