A penny saved is a penny earned and very little extra in a savings account earning interest at today's rates.
Interest rates paid by banks for customer deposits are at their lowest level in years and could fall further, according to bankers and industry watchers. Money-market accounts, savings accounts and certificates of deposit are nearing what is expected to be the bottom of more than a two-year trough in the making.
Nationally, the average rate offered on money-market accounts has dipped to its lowest level since they were introduced at the end of 1982, matching the average rate for passbook savings accounts, according to Bank Rate Monitor, a weekly publication tracking the industry. Both money market and passbook savings rates are at a stated rate of 5.01 percent, the newsletter said.
The reasons for these lean times vary. Some banks point to an increase in federal deposit insurance premiums for depressing savings rates, while others cite the generally lower amount banks can earn from interest rates on loans because of recent drops in the prime lending rate.
Some economists predict that if the Federal Reserve again lowers the amount it charges for the money it lends banks, as many predict it will, interest rates could drop further.
"The jury is out on whether we get one more round of interest rate cuts or not," said David L. Donabedian, chief economist at Mercantile Bankshares Corp. in Baltimore. "We may get one more cut by the Fed but that would be the last one. We're very close to the bottom in short-term interest rates."
Mr. Donabedian, like many other bankers and economists, expects interest rates to begin rebounding early next year.
What irks some observers is that, while interest rates paid for deposits have fallen by roughly a third over the past year, the cost of borrowing has not dropped by a similar amount. The decline in rates for short-term CDs, for example, has sliced an average 2 percentage points off the 7 percent interest rate offered a year ago, according to Bank Rate Monitor. From the beginning of the current downturn in April 1989, short-term CD rates have fallen an average of 3.75 percentage points.
At the same time, credit card rates are up 0.9 percentage points while auto loans have fallen less than 1 percentage point, said Bank Rate Monitor publisher Robert K. Heady.
"Where the consumer is getting shafted is that loan rates have not followed savings yields downward," he said. "In effect, the consumer is picking up the tab for the banks' bad loans."
James W. Fulcher, vice president for branch administration at Signet Bank/Maryland, said rates were set using two basic guidelines. Banks routinely compare their rates with those of neighbors to remain competitive. The second guideline, he said, is what banks must pay if they borrow money elsewhere rather than attracting depositors' funds.
If a bank can "buy money from other institutions at 5.5 percent, why should you pay more than that in way of garnering deposits?" he asked.
At First National Bank of Maryland, a lower interest paid on a variety of savings accounts will take effect Oct. 1, according to a letter mailed to customers recently.
The bank said the decline, down 0.25 percentage points to 5 percent on a savings account tied to a checking account, was due to a combination of lower interest rates generally and higher premiums paid for federal deposit insurance premiums, which has increased to 23 cents per $100 in domestic deposits from 12 cents near the end of last year.
At Mercantile-Safe Deposit and Trust Co., the higher insurance rates have resulted in changes for retail consumers and business customers. Monthly fees on commercial accounts have increased fourfold to $8 per account because of the higher FDIC insurance premiums, according to Thomas A. Mariani, senior vice president for retail banking.
And the rates tied to NOW accounts and regular savings accounts were lowered nearly a year ago to offset the higher premiums.
Given the additional drop in interest rates, Mr. Mariani said his bank was studying whether further cuts should be adopted.