Online banks are boosting rates on savings accounts and certificates of deposits as fear of deposit flight plagues regional institutions. After March’s havoc in regional banks – when Silicon Valley Bank failed as depositors yanked their cash – worries about further financial instability have resurfaced. Most recently, First Republic Bank joined the ranks of failed institutions after regulators seized the ailing bank and sold it to JPMorgan Chase last weekend. It doesn’t help that depositors can find attractive yields elsewhere. Consider that short-term Treasury rates have climbed sharply since the Federal Reserve kicked off its rate-hiking campaign more than a year ago. Yields on 3-month T-bills are at about 5.2%, while the 1-year Treasury is yielding 4.7%. US3M 1Y mountain Short-term Treasury yields have risen dramatically since the Federal Reserve’s rate-hiking campaign. Money market fund yields are also rising; the Crane 100 Money Fund Index is showing an annualized 7-day current yield of 4.64% as of May 2. Relative safety with an added benefit for banks In the competition for depositors’ dollars, online banks are also raising the rates they pay on savings accounts and CDs as investors seek a safe place to stash their cash. Banks that have boosted rates over the last week include Bread Financial Holdings and Capital One Financial , according to a May 2 report from Goldman Sachs. Bread offers an annual percentage yield (APY) of 5.2% on a one-year CD and 4.65% APY on savings accounts. Capital One has an APY of 3.75% on its savings account, and it pays 4.15% APY for a one-year online CD. Other online institutions paying attractive rates on one-year CDs include Synchrony Financial, which pays 4.75% APY, and Ally Bank, which offers a 4.5% APY. At a time of anxiety over deposit flight, banks get an additional benefit from making their CDs attractive. Dollars in these instruments are sticky because clients will forfeit some interest if they “break” the CD before the end of its term. Higher deposit betas at last? Analysts expect higher rates from online banks to spur other institutions to raise their deposit betas – that is, the amount by which rates paid to customers increases following a boost in the fed funds rate. “During 1Q23, several banks in our coverage universe increased their deposit beta guidance for the current rate hike cycle,” wrote Betsy Graseck, analyst at Morgan Stanley, in a May 1 report. She highlighted Citizens Financial Group , Comerica , Fifth Third and Huntington Bancshares as some of those institutions. “Many cited accelerating deposit competition over the past several weeks as well as mix shift into higher cost deposit segments like money market and CDs,” Graseck added. — CNBC’s Michael Bloom contributed to this report.
