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
You were a child at a time when interest rates were quite high overall.
When you were 10 years old the interest rates were around 14%. Great for young kids who didn’t have any debt but horrible for adults who did.
Now interest rates are lower now but you can get a CD for over 5% though even today.
[https://fortune.com/recommends/banking/the-best-cd-rates/](https://fortune.com/recommends/banking/the-best-cd-rates/)
4% CD is trash. Online Banks offer higher interest rates and you’re not locked in. For example, Barclay’s Savings is 4.35%. Chase is 0.01%. Why the fuck would you want to put your money in a Chase savings account? Literally 43,500% higher interest rate with no real drawbacks.
A savings account is basically you extending a loan to the bank, they loan your money out to others at a higher interest rate, and they pocket the difference. The downside from the bank’s viewpoint is you can demand your money back at any time.
CDs are basically the same idea as a savings account, except you can’t just demand all your money at any time without penalty — that makes it easier for the banks to do bank things, making sure they have enough cash lying around. So they usually pay a slightly higher rate on CDs than they would on a savings account.
The bank doesn’t HAVE to borrow from you — they could borrow from the fed if they want. And the fed isn’t going to suddenly demand all their money. So they’re really only interested in borrowing from you if it’s cheaper than borrowing from the fed.
https://fred.stlouisfed.org/series/FEDFUNDS
There’s the effective federal funds rate over time. Back in the late 80s, the federal funds rate was near 10%, so they could offer fairly high rates to customers. When the 2008 crash happened, the federal funds rate dropped to nearly 0%, so there was no benefit in borrowing from people vs borrowing from the fed. So they offered some absurdly low savings account rates. That rate has generally stayed low until 2022, so there was a long stretch where higher savings rates weren’t around. Now the federal funds rate is back up to over 5%, so you can find savings accounts and CDs that pay something in the vicinity of 5% again.
Why do some banks like BofA offer savings accounts and CDs at way lower rates than you can find elsewhere? I don’t know, but I can speculate…
* Greed. The larger the difference between the rate they offer you and the rate they loan the money out at, the more money they pocket.
* They don’t want to loan money out, so they don’t want your money. Some banks prefer to make their money servicing loans rather than actually holding the loans because it’s lower risk. If they don’t hold the debt, then they aren’t harmed if somebody stops making payments.
* Connections to other accounts. Chase offers like 0.01% on CDs, even lower than Bank of America, but they offer higher rates if you have a linked checking account. They’re after customers, not just cash on hand.
* Convenience — they’re selling access to an ATM network, brick-and-mortar locations near you, etc. So maybe they can get away with offering crappy rates.
EDIT:
You can go around hunting for high rates on savings and CDs… there’s nothing wrong with doing so. But be aware that you may have other options with less hassle. Money funds are a type of mutual fund that invests in things like short term CDs, short term government bonds, etc. They generally have a fixed price per share of $1.00, and they pay out any gains as dividends. Most brokerages have money funds that you can trade with zero fees. (e.g. VMFXX at Vanguard, SWVXX at Schwab, SPAXX at Fidelity). Their dividend yield is generally competitive with savings and CD rates, though you might find teaser rates even higher at some random bank. Currently, VMFXX at 5.27%, SWVXX at 5.2%, SPAXX at 4.98%. A downside is the rates aren’t “locked in” like the rate you might have with other vehicles. If the fed drops the funds rate to near 0% tomorrow, these would start returning near 0% as well. On the other hand, the opposite is also true… If rates go up tomorrow, these start returning higher rates too.
Because banks banks have become so deregulated that they no longer really need to compete for your deposits. Back in the 80s and 90s they had to have a certain amount of deposits relative to their loans. More deposits means they could make more loans and therefore make more money. So they could compete for something like a CD from an individual.
They could afford to pay 4% on 100k because that 100k turned into a million in loans that they were earning 8% on.
Today that’s MUCH less the case because reserve requirements are just no longer the limiting factor with most banks. Because we’ve allowed the investment banks to merge with the retail banks the limiting factor is now capital requirements and nobody gives 2 shits about deposits anymore.
That’s my understanding, but I’m no banking expert.
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 🙂
Most people are telling you “look for competitive rates.” But they aren’t telling you *why* the rates are lower.
The bank isn’t giving you money to be generous. The money they pay you to borrow your money (because that’s what happens when you keep cash in a savings account or buy a CD), they only get by charging other customers interest on their loans. So if they have a mortgage that’s paying them 6% interest, they can afford to *borrow from you* at 4.75% on your savings account or CD. But if the Federal Reserve will loan them money at 0% (as they did for about a decade before the last year or so), then why should they pay you anything to borrow money? Because of this, high yield savings accounts and CDs paid nothing between ~2010 and 2022.
But now the Fed rate is at 5.5%. So home loans are at 7%, and you can get a CD or high yield rate at ~5% again. My Ally account went from .2% to 4.35% with me doing nothing. It tracks roughly with the Fed rate. I could get a better rate if I moved my money to some more competitive banks or credit unions, but that’s a hassle, so I don’t. And most people don’t. Because they don’t, you’ll still find plenty of savings accounts with shitty rates.
You also have to consider the long term outlook. Right now I can get a 12 month CD from Ally for 4.65% or a 5 year one for… *3.9%*?!? WTF is up with that?
Well, most people (and most economists) expect the Fed to start cutting their base rate later this year. If that happens then Ally doesn’t want to be stuck paying out 5% to borrow my money for 5 years when they could be borrowing from the Fed at 3% (or whatever). So, there are some weird distortions like that in the market as well.
Its not that they can’t…. they simply do not want to as it would impact their need for reccords profits year on year.
You’re looking in the wrong places. Chase CD rates are not at all representative of the whole CD market. There are plenty of banks and credit unions offering 1yr >5.0% CD rates with no minimum deposit. https://www.bankrate.com/banking/cds/cd-rates/
You’re just not going to find them at the biggest banks right now.
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