The Humble Saver Rediscovers Banks

The interest a consumer in the U.S. can earn on his or her savings account is insultingly small these days—just 0.80 percent on average in October, vs. 3.38 percent in October 2007, according to Market Rates Insight, a provider of financial rate data. Most checking accounts don't even pay interest.

Such tiny or nonexistent returns should encourage consumers to yank their savings from the bank and seek higher yields elsewhere. These are not normal times, though. Since October 2007, says Market Rate Insight, deposits at banks and credit unions have increased by $1 trillion, to $7.74 trillion, an all-time high.

What's going on? Traumatized by the recession, households are saving more. The savings rate has averaged 5.7 percent of disposable income this year, up from 3.1 percent in the prior decade, according to the Commerce Dept. The newly thrifty have to put their savings somewhere. Says Nancy Bush, an independent bank analyst based in Annandale, N.J.: "Deposit levels in the banking system will be higher than in the past because consumers will be spending less and saving more, even when the economy picks up."

Consumers are opting for safety over income when they stash their money in the banks. That means picking savings or checking accounts at FDIC-insured banks. Savers also lean toward savings and checking accounts because they offer instant access to their funds, as opposed to certificates of deposit, which offer a higher yield but penalize holders who want to withdraw funds early.

The surge in savings has increased the importance of so-called core deposits for commercial banks. Wells Fargo (WFC), the fourth-largest lender by deposits, and fifth-ranked U.S. Bancorp (USB) have said they're competing for such funds, which include checking and savings accounts and time deposits of less than $100,000. Banks have relied more on these deposits for funding since the freeze in credit markets sparked the financial crisis.

The industry must shift from raising funds in debt and securitization markets to increasing core deposits. "Other sources of funding are drying up," says R. Christopher Whalen, a former Federal Reserve analyst and co-founder of Institutional Risk Analytics in Torrance, Calif. "The banks that have stable funding will inherit the earth."

Banks consider core deposits more dependable in times of stress since customers with checking and savings accounts are more likely to keep their money in the bank than investors are likely to purchase new bank bonds. Borrowing by U.S. commercial banks fell 17 percent since July of last year, while deposits increased 9 percent in the same period, according to the Fed.

Deposits funded 81 percent of banks' growth in loans and securities during the third quarter, the FDIC said on Nov. 23. "One of the most overlooked aspects of the current cycle is the shift in funding," says Todd Hagerman, a banking analyst in New York with Collins Stewart, a London-based brokerage. "We're seeing ongoing deleveraging," he says, which means "more reliance on core funding sources."

Core deposits are also valued because banks can easily lend the money at higher rates than they are paying depositors, or profit just by purchasing Treasuries. Customers who provide core deposits, particularly those with checking accounts, are thought to be the most loyal, says Richard C. Hartnack, a vice-chairman and head of consumer and small business at Minneapolis-based U.S. Bancorp. "We're acting as a safe storage place for people's liquidity," he says. "As long as we do a good job, most clients are happy with the proposition."

The bottom line: Americans are saving much more than in the last decade, and at lower rates. Those savings are boosting deposits at U.S. banks.

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