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One of the big problems with all this is that in many cases the firms most aggressively competing for deposits aren't taking the money and lending it out but are instead holding on to it to buttress their balance sheets. Since consumers and businesses are so starved for credit, the banks that do want to lend the money forward are finding some ability to charge rates at a greater premium to prime, says Koch, but that doesn't necessarily make up the entire gap. Banks in general are still spooked by loans gone bad and nervous about lending to individuals and businesses without top-tier credit scores.
Banks looking to invest the money they raise through deposit-gathering are finding that the numbers barely work at all. Easton Bank's Menzies, for example, recently lost a bid to get $5 million in cash from a local government in exchange for the bank's issuing the government a one-year CD. The winning bidder agreed to pay the government 3.72%. Menzies had offered 2.69%, which he considered a high rate, one that probably would have netted him just a 0.04- or 0.05-percentage-point profit after he rolled the money into an investment like a Fannie Mae mortgage-backed security. (See "Four Steps to Ending the Foreclosure Crisis.")
So how could someone else offer a higher rate? Chances are, the bidder wasn't looking to make a profit — just trying to inject liquidity into the institution's balance sheet — or was pursuing riskier investments in order to make the transaction make sense. "When a bank chases yield, they then start making riskier investments or riskier loans," says Fine of the Independent Community Bankers of America. That's not something we particularly need more of right now.
As banks' margins are squeezed, there's one other looming consequence: higher fees. "They've got to do something to remain profitable," says Rick Barham, CEO of Market Rates Insight, which tracks pricing trends for financial institutions. His firm is being flooded with requests for fee studies — competitive overviews of how much other banks are getting away with charging customers for things like bounced checks. Many banks are moving to a tiered fee structure. The first time you overdraw your account, you might be charged $28, but do it again and the penalty becomes $32.
Looking ahead, the situation isn't likely to right itself anytime soon. Many economists expect the Federal Reserve Board to again cut the target federal funds rate in mid-December in an effort to juice the economy by encouraging spending over savings. But that would probably also push down even further the rate at which banks can lend. "It would mean banks make a little less money across the board," says Bank of Alameda's Andrews. Not exactly a nice holiday gift.