Why savers still aren't getting any bang for their bucks

Savers have been encouraged to see the Federal Reserve raise its benchmark short-term interest rate four times since December 2015 by a quarter percentage point to a current range of 1%-1.25%. But here’s the bad news: banks aren’t passing along the extra to depositors.

Simply put, banks make money on the difference between the interest rate they charge borrowers (which is typically based off the prime rate and yields on long-term bonds) on loans and the interest rate they pay depositors on their savings.

Following the financial crisis, for seven years, the Fed kept rates near-zero as Treasury yields also remained low, crimping profits that banks could make on loans.

Even though the Fed has raised its benchmark interest rate, it still remains low by historical standards, keeping profit potential low.

Meanwhile, loan growth has slowed.  For the first half of this year, loan growth averaged 2.4%, compared with 4% growth for the first half of last year, just as deposit growth in the first half has averaged 5%, Fed data show.

Another issue: the banking industry is awash in deposits. As of July 21, total deposits at U.S. commercial banks equaled $11.74 trillion, notching an all-time high, according to Fed data.

That means less of an incentive to increase rates on deposits because the banks already have funds they need to lend and operate.

The average return on a savings account in the United States is a mere 0.08%, according to Bankrate.com. Compare that to 2007 when savers could get up to a 6% return at the bank. Here is a breakdown of the current savings rates at the country’s biggest banks as of Tuesday.

Dollar Savings Direct [online banking division of Emigrant Bank] 1.4%

CIT Bank 1.3%

Sallie Mae 1.3%

Ever Bank 1.2%

Goldman Sachs 1.2%

Ally Bank 1.15%

American Express 1.15%

Barclays 1.15%

Capital One 360 1.10%

Chase bank 0.01%

Citigroup 0.04%

Bank of America 0.01%

Assuming $10,000 in one’s savings account, at the highest going rate off line of 1.3% you’d earn $130 per year.

Putting your money into the highest available yielding certificate of deposit, which locks your money up for as much as five years, only yields you $235 annually at a rate of 2.35%.

CD rates ranked by highest rates nationally based on maturity:

Synchrony Bank 2.35% 5 years

Ally Bank 2.25%   5 years

Barclays  2.3%     5 years

Goldman Sachs  2.25%   5 years

Barclays   2.05%   4 years

Synchrony Bank  1.95%   4 years

Goldman             1.90%   3 years

Sallie Mae           1.90%     3 years

Synchrony Bank 1.80%     3 years

PurePoint Financial  1.65% 3 years

Ally Bank                1.60% 3 years

Synchrony Bank   1.65%   2 years

Capital One            1.5% 18 months

Goldman Sachs     1.45% 18 months

Goldman Sachs      1.40%    1 year

Synchrony Bank      1.40%     1 year

Pure Point Financial  1.35%  1 year

Data source: Bankrate.com

“You have to think about it as do you think the Fed’s benchmark interest rate will go up in a year more than what you’re locking your CD rate in for,” says KBW analyst Collyn Gilbert.

“Bottom line while we’re seeing CD rates at 1.5%, that’s still not much return on your money,” says Gilbert. “We’re at such a low level of interest rate you’d need to see a much higher rate move before you start to see the majority of people moving their money.”

Gilbert expects deposit rates to inch up toward the end of this year, beginning of next, as the Fed has signaled it could raise its benchmark interest rate a third time this year.

Analysts expect if the Fed does raise rates again it will be in December. Though the timetable could get pushed out if inflation, which has been weak, doesn’t pick up.

The biggest increases in deposit rates will be higher in some pockets of the country than others, says Gilbert. “I still think it’ll be regional. I don’t think you’ll see national trends lift to the level that we might see in different parts of the country.”

Banks in states that pay the highest rates on deposits are Utah, Oklahoma, New Jersey, Louisiana and Virginia, according to KBW.

Lenders in the New York market are growing more desperate for deposits and Gilbert says they’ll start to raise rates on deposits. That could ignite competition.

“If you see your competitor is raising rates, then you have to raise rates too, because you don’t want to lose your customers,” says Gilbert.