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Gap between savings, loan rates is bad, may get worse

The noose has gotten tighter around your pocketbook.

Reason: What's been quietly taking place with banking numbers.

As savings rates continue to decline _ down to a disturbing 2 percent to 3 percent range at some banks _ the disparity between what you earn on CDs and what you pay on loans has become wider.

That's not the script President Bush has in mind, as the administration gropes for a way out of the recession.

Bush and the economic pundits declare, each time the banks cut their prime rate (currently at 6.5 percent), that it is a boon for consumers. A lower prime, they say, automatically means "lower borrowing rates."

A beautiful theory. We all know that when folks borrow and spend more, it pumps more money into the economy and stimulates business.

But that's not exactly what is happening, even though the news media last year focused on the growing savings-vs.-loan-rate gap. You'd think that in the spotlight of all the negative publicity, the banking industry would haul down lending rates at the same speed as savings rates.

If anything, the gap is getting wider, faster.

Here's what has happened between last Labor Day and the present, according to Bank Rate Monitor:

The banks' prime rate has fallen by two full percentage points.

Interest yields on your short-term CD accounts have plunged by nearly one and three-quarters of a percentage point.

But the rate you're charged on credit cards has decreased by a scant 16 hundredths of a percent, on average. That on a personal loan by only six-tenths of a percent, and on new-car loans by only 1 percent.

By comparison, prime fell half a percentage point in the second quarter of 1990, while CDs declined two-fifths of a point, card rates rose 5 hundredths of a point, personal loans dipped an eighth of a point and car loans dropped one-fifth of a point.

That's only the short view of things. When you look back to when the noose-tightening began, in 1989, you discover that:

You're now earning only 3.9 percent interest on the average six-month CD vs. 9.34 percent then _ a difference of about 5.44 percentage points. Putting it another way, you've lost 58 percent of your earnings power on savings!

Credit card rates have actually increased by seven-tenths of a percent; personal loan rates are down only two-thirds of a percent; and auto loans, the only modestly bright spot, have declined by about two and one-quarter percentage points.

And the picture could get worse. There's pressure on the Federal Reserve to ease interest rates further, and when that happens, the banks would cut their prime again. Savings rates would fall even lower by Easter, perhaps by another quarter-point or so.

But how much lower can they go?

All five largest commercial banks in New York now pay a yield of 2.02 percent on checking accounts. Ditto Wells Fargo in San Francisco, and Superior Bank in Chicago.

Chase Manhattan Bank in New York pays on its Money Market Account a paltry 3.05 percent; Texas Commerce Bank and First Interstate Bank, both in Houston, are at 3.04 percent.

In fact, among the 100 largest banks and thrifts in the Bank Rate Monitor National Index, 74 currently pay less than 4 percent on MMAs.

Passbook accounts also are being squeezed. A national spot check conducted Feb. 12 shows passbooks are averag

ing 3.51 percent, down from 4.8 percent in October. That matches their level 30 years ago, and is only a whisker away from the 3 percent paid in 1957, or the 2.5 percent in 1936.

If the Fed cuts rates again, you'll be closer to those numbers than you are today.

As for the widening gap, it may not be good for you and me _ or George Bush _ but it should help the banks improve their profits in the first quarter of 1992. That's not altogether bad, considering the nightmare the industry has been through over the past couple of years.

Latest rate trend: Mortgage rates dipped one-tenth of a percent, to 8.55 percent on 30-year fixed-rate loans. Short-term CD yields and MMAs fell again, by between 4 and 5 hundredths of a percent.

Robert K. Heady publishes Bank Rate Monitor, 100 Highest Yields and other financial newsletters from his office in North Palm Beach.