Specials on deposit accounts are promotional rates designed to attract new money or to shift balances to term accounts, which provide stable and projectable liquidity to the institution. In the 12-month period from June 2013 to May 2014, neither of these objectives has been reached overall by the use of promotional rates. Moreover, it is likely that institutions incurred higher interest expense with specials on balances they could have obtained for a much lower regular rate.
Analysis of the percentage change in regular annual percentage yield (APY), special APY and balances of deposit accounts shows that specials on long-term certificates of deposits (CDs) of over three years were the most ineffective in attracting new money. During the 12-month period, the average APY of specials on such CDs increased by 75.7%, yet balances fell by 5.9%. Similarly, the APY on promotional mid-term CDs (one to three years) increased by 15.7% while balances decreased by 3.5%. For short-term CDs (up to one year) the specials’ APY rose by 13.3% while balances dropped by 2.3%.
The picture is slightly different but not any better for checking and money market accounts. The APY on promotional checking and money markets was flat in the past 12 months, yet balances increased by 14.1% and 6.6% respectively. Moreover, the balance increase in these accounts occurred despite a decrease of 4.1% in the regular APY of checking and 6.5% for money market accounts.
Perhaps the most revealing finding of this analysis has to do with savings accounts, which experienced a 13.7% increase in specials’ APY during the period while balances increased by 9.1%. However, it is not very likely that these promotional rates contributed much to the increase in savings balances since balances of other liquid accounts increased as well even while the rate on their specials remained flat. Thus, it is plausible that savings account balances would have risen anyway without institutions having to pay a higher APY for specials.
The obvious conclusion, then, is that promotional rates are not very effective in attracting new money or in shifting balances to long-term accounts. It is possible that gains might be achieved for individual institutions and/or in specific markets, but overall, nationally, the specials aren’t working in the current rate environment.
Mr. Geller is the executive vice president of San Anselmo, Calif.-based Market Rates Insight, which provides competitive research and analytics to financial institutions. He can be reached at email@example.com.
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