51M. As a child I had a children’s saving account with compound interest. My $100 went up to just below $200 in around 4 – 5 years. That seems like peanuts, but to a kid that was a lot.As a young adult, in the mid 1990s, I remember my older colleagues were talking seriously about CD interest rates to put away for up to five years, at 6%.
Now, in 2024, with the major banks, a one-year CD from Bank of America is 0.03%. Maximum rates for 5 years is 2.5% at Chase, no matter how much money you put away. Savings accounts compound interest rates are 0.01%, max, IF you maintain at least $10,000 in the account.Yet interest rates for a housing loan are at 7% and putting housing purchases out of reach. How can the banks do this?
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In: Economics
Why *can’*t they?
They absolutely can – at least at the rates you’re talking about. Right now as of 2024-02-21 [Capital One’s](https://www.capitalone.com/bank/cds/online-cds/) 1 year CD is 5%, 2 year is 4.3%, and 5 year is 4% – you can probably find better if you shop around [like someone else pointed out](https://www.reddit.com/r/explainlikeimfive/comments/1awe5z6/eli5_why_cant_the_major_banks_offer_decent_cd/krh5ik9/).
(Right now the interest rates are lower on longer terms in most places I look because the banks aren’t optimistic on being able to keep charging high rates on debt that many years out: They’re not going to give you a CD that will put them in the red if they can’t loan the money out for more than they’re paying you to keep it with them.)
Bottom line is when I look them up right now the current prime rate is north of 8% and the Federal Funds Rate is sitting in the low-mid 5% range, so the banks absolutely ***CAN*** offer better rates on deposit instruments like CDs as long as they’re putting that money to work.
Why ***don’t*** they? Two reasons.
First because they want to keep that money as profit.
If the bank lends out your deposit at 5% interest and pays you 5% interest the bank makes 0% on the money they’ve loaned out every year. If the bank lends out your deposit at 5% interest and offers you 0.01% interest they make 4.99% interest on the money they’ve loaned out every year.
Second because there are other factors affecting the demand for loans vs. the amount of money sitting on deposit too – many banks are sitting on a lot of cash right now that’s *not* loaned out making them money so they don’t want to pay depositors a lot of interest because they’d be operating at a loss, and *good, responsible, stable* banks don’t like doing that.
The banks could theoretically generate demand for that money by offering low-rate loans at 1-2% and pay you 0.5-1% – still a pittance in terms of interest income unless you’re sitting on fat stacks in your savings account, but a more respectable pittance than 0.01-0.05%. They’re not doing that though, and I’m sure they have reasons but those reasons are out past my “Bank Systems For Dummies!” level of understanding 🙂
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