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Big banks enter race for deposits

By MADLEN READ | the Associated Press • Published October 13, 2007

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Early in the decade, this figure was in the double-digits when economic turmoil caused people to pull money out of riskier assets and place it in savings accounts.

The recent slowdown is a bit deceiving: it's happening largely because more people have taken money out of savings accounts and put it into higher-yielding money-market accounts. This is what 26-year-old Ann Geppert did in September, and now has an annual rate of nearly 5 percent on her savings instead of about 1 percent.

"I'll be putting more into it a little bit later," said Geppert, who works at a PR firm in St. Louis. "It's a lot better deal."

A few years ago, savings accounts offered better rates than money-market accounts. Banks' profits from money-market accounts have slipped because the yield curve - the difference between long-term and short-term yields - has been close to flat. Banks profit when long-term yields are significantly higher than short-term yields, because they borrow cash at short-term rates to lend to customers at long-term rates.

"The banks were under, and are under, considerable margin pressure," said FDIC chief economist Richard Brown.

The yield curve has improved a bit over the past few months, but it's still not as beneficial to banks' profit growth as it was a few years ago.

"While growth should improve into 2008 along with a more favorable interest rate environment, the benefit is not likely to be material until the yield curve improves," Goldman Sachs analysts said in a research note.