Interest rates that banks pay savers have been dropping for two years. At the same time, charges for consumer loans, especially on credit-card balances, remain stubbornly high.
The banking industry says the increasing spread is justified because of higher delinquency and default rates resulting from the recession, pressure on earnings and regulatory demands that banks boost capital ratios and reserves. Observers say banks are using fat profit margins on the consumer side to plug losses from bad commercial loans.
"Consumers are caught in a massive squeeze," said Robert K. Heady, publisher of the weekly Bank Rate Monitor, which tracks rates nationwide. "Short-term savings rates have dropped like a rock while consumer rates have risen."
According to Bank Rate Monitor, as of April 24 the average yield of a six-month certificate of deposit has fallen 3.25 percentage points since April 1989, from 9.34 to 6.09 percent -- a nearly 35 percent percent drop that Heady termed "staggering." The yield for one-year CDs has fallen 3.15 points, from 9.51 percent to 6.36 percent, and five-year CDs, 1.96 points, from 9.20 percent to 7.24 percent. Interest paid on consumers' money market accounts has dipped from 6.62 percent to 5.44 percent.
During the same period, the average credit-card rate has increased from 18.09 percent to 18.92 as of April 30, and the average rate for unsecured personal loans has risen from 17 to 17.27 percent. Auto loans have declined only slightly, from 12.54 to 11.88 percent.
"The numbers don't lie. It's very clear that the consumer is paying the tab for the banks' bad commercial loans," Heady said.
"We're seeing some banks pay as little as 4 1/2 percent yield on a one-year CD and charge 18 percent on credit cards. In retail parlance, that's a 300 percent markup on the cost of their money," Heady said.
The gap has widened despite the Federal Reserve's continuing push to lower rates. Tuesday's cut in the discount rate -- the amount the Fed charges banks for borrowing -- to 5.5 percent was the third since Dec. 18 and puts it 1.5 percent under the April 1989 level. The Fed's action also pushed the key federal-funds rate -- what banks charge each other for overnight loans -- down to 5.75 percent from 6 percent. Yesterday in response big banks cut their prime rate -- what they charge their best commercial customers -- a half-percent to 8.5 percent.
Virginia Stafford, spokeswoman for the American Bankers Association, based in Washington, said that added costs and losses associated with delinquencies, defaults and bankruptcies due to the recession were partly to blame for the widening spread between consumer loan rates and savers' rates. Since 1989, she said, delinquencies -- payments more than 30 days past due -- on installment loans for goods such as cars and boats have increased 12 percent. In addition, she said, there was a lag time between the drop in the banks' cost of funds and a
drop in consumer loan rates.
"Hopefully, as the recession subsides, consumer rates will come down," she said.
John Bowers, executive director of the Maryland Bankers Association, said bankers would not be quick to drop consumer rates until they were convinced the lower rates were "for real and not a quick blip downward."
And, he added, "Obviously, the banks are having tremendous earnings pressures, especially because of bad commercial loans. It's pretty tough to lower interest rates and erode your margins in cases like that."
But he said he eventually expects consumer loan rates to decline.
"CD rates and the prime rate almost immediately track capital markets," Bowers said. "Consumer rates are slower. . . . While interest rates have been higher here in the mid-Atlantic region because of stress and strain on financial institutions, I expect competitive pressures will push them lower." Industry observers, however, said rates on credit card balances appeared almost immune to market trends.
"Credit card rates seem to defy the laws of economic gravity," said Elgie Holstein, director of Bankcard Holders of America, a non-profit consumer group. "Nobody is saying they should match other rates, but they at least should track the overall trend. But, indeed, the trend lines are moving in opposite directions."
While other market rates are about half what they were a decade ago, credit-card interest rates are higher than 10 years ago, Holstein said.
"They have never gone down," he said.
Stafford noted that one-third of credit-card holders pay off their balances each month so they don't focus on the interest-rate level.
In defense of the rates, she cited "very high" administrative and operating expenses for credit cards as well as the fact that they are unsecured.
Heady and other industry observers, however, contended that the root reasons were neither high costs nor delinquency rates.