By Marilyn Barnewall
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Why is it so difficult to get a decent rate of return on deposits with American banks?
Once upon a time?until the 1980s?Regulation O (pronounced ‘oh’) set minimum and maximum rates of interest banks and other financial institutions could pay on savings deposits.
Commercial banks could pay no more or no less on savings accounts than 5 percent. For a savings account with a time commitment of 90 days or more, banks could pay 5.25 percent.
The old savings and loans had a distinct advantage when it came to savings rates. They paid one-quarter of one percent in higher interest rates than banks did. Their regular savings account was 5.25 percent; passbook accounts with a time commitment paid 5.50 percent.
What happened? How did we go from a guaranteed 5 or 5.25 percent rate of return on a no time commitment savings account to less than 1 percent?
In the mid-to-late 1970s, a new thing called money market accounts became available at brokerage firms. Money market accounts paid twice what savings deposits paid… sometimes more.
People moved a major portion of their deposits into money market accounts with brokers to get the higher rate of interest. The banking industry was in serious trouble.
Congress?which knows little of how the financial world functions?eliminated Regulation O. It would be much better for consumers, they said. Banks would be able to pay higher rates of interest on customer deposits.
Well, we’re all experiencing just how wrong Congress was.
In order to for bankers to compete with brokerage accounts that paid from ten to 15 percent more than bank savings accounts, one of two things had to happen:
1) Brokerage money market funds would have to comply with bank regulations when offering bank products. They would be regulated, paying the 5 or 5.25 percent interest rate to which banks were limited.
Or, 2) Congress would have to let banks pay the same rate of deposit interest brokers paid.
Now, if you’re a consumer, you are going to like Option Two. Well, you’ll like it until the prime rate goes to 19 percent, car loans are 18 percent, and mortgage loans are in double digits. Banks have to recover their cost of funds by pricing loans higher than deposit rates of interest.
Brokers do not make loans required by the business community for expansion and jobs. They do not make car loans so companies like Ford can sell new cars and keep production lines working. They do not make mortgage loans so you and your family have a place to live.
If brokerage houses were going to provide bank deposit products to their customers, it made sense for them to comply with banking regulations. Perhaps that is why Congress decided to do the opposite. They allowed banks and savings and loans to offer the same high rates of deposit interest that brokers were paying.
As a result, during the Carter administration the prime rate went as high as 21 percent. To compete for deposits with brokerage houses, banks had to pay 18 percent on money market accounts.
Businesses stopped borrowing… they were not going to pay 21 percent prime rate plus for credit. Massive layoffs occurred and unemployment went into double-digits.
But, there may be a solution to all this. One new product I have investigated for its higher rates of interest is foreign currency accounts.
Before you give me a typical conservative response to investing in anything foreign, hear me out. Your money stays in the good old U.S. of A., in an American bank.
Foreign currency accounts can now be opened in several American banks. I got my information from Everbank (www.everbank.com). It is a St. Louis bank and a nationwide division of First Alliance Bank. The FDIC insures the dollars you invest in an Everbank foreign currency account. It does not insure against loss if the value of the currency in which you invest goes down.
We are currently in a weak dollar cycle. If you map strong dollar/weak dollar cycles, each tends to run five or six years. Since our current weakened U.S. dollar cycle began in 2002, other currencies should do well against the dollar for at least two or three more years.
That, of course, is the gamble.
Current CD rates are listed at everbank.com. They offer a higher rate of return than American CDs with terms of from three months to one year. The only difference between this CD and others is that during the time the money is on deposit with the bank, it is converted into another country’s currency. The actual cash stays in an American bank.
Everbank has World Currency Index CDs… three or more currencies for investors with specific objectives. For people who like oil, The Petrol World Currency CD (currencies of three non-Arab oil-producing countries) is available. Interested in commodities? The Commodity CD (four currencies from commodities-producing countries) is available.
There is the European Opportunity CD, The Geographic CD (currencies diversified across five continents), The Viking CD (Sweden, Denmark and Norway), and The Investor’s Currency Opportunity CD (four currencies).
If the euro goes up in value by comparison to the dollar during the term of a CD, the agreed upon interest rate will be paid in euros, as agreed. Investors also realize the benefit of the increased value of the euro.
If you pay less per euro than when your CD matures, you receive the agreed upon interest rate on the CD, plus the increased rate of each euro. Why? Because you buy back your dollars in euros and the each euro increased in value?three or four cents, let’s say?against the dollar.
If the euro price remains the same during the time you hold the CD, it is a wash. The euros you invested are converted to dollars and you get the amount you invested plus CD interest earned.
If the dollar rallies against the Euro (if you bought euros when the rate was $1.25 and the euro drops to $1.21), you lose four cents per dollar when you convert your euros back to dollars. You still receive the higher rate of CD interest, however.
Anyone interested in getting more detailed information about foreign currency certificates of deposit and other foreign currency products can go to the everbank.com Web site.
They have a wealth of information available… and a free daily newsletter about foreign currency investing.
Marilyn Barnewall, in 1978, was the first female to be named vice president in charge of a major loan and deposit portfolio at Denver’s largest bank. She started the nation’s first private bank, resigned to start her own firm and consulted for banks of all sizes in America and other countries. In June 1992, Forbes dubbed Barnewall “the dean of American private banking.” Author of several banking texts, she has written extensively for the American Banker, Bank Marketing Magazine, and was U.S. consulting editor for Private Banker International (Lafferty Publications, London/Dublin). Article originally appeared in the Grand Junction Free Press. Marilyn can be reached at [email protected].
