Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SUNDAY, October 23, 1994 TAG: 9411160021
SECTION: BUSINESS PAGE: F1 EDITION: METRO
SOURCE: MAG POFF
DATELINE: LENGTH: Long
Lately, however, that banking response has been something less than responsive to the changing interest environment.
In the last year, the so-called Federal Funds rate - the price that banks charge to borrow from each other, generally overnight - and the prime rate - which affects most borrowers. at least indirectly - have each climbed by 175 basis points or by 1 3/4 percentage points. The basic Fed Funds rate has climbed from 3 to 4 3/4 percent, pushing up prime from 6 to 7 3/4 percent.
At brokerage houses, the interest rate is lagging by a little, as it always does.
Tyler Pugh, senior vice president and branch manager at the Roanoke office of Wheat First Butcher Singer, traced a typical money market mutual fund offered by his company. These are liquid accounts that invest in short-term government and other securities.
From the year's low of 2.50 percent in February, the daily interest rates moved to 2.56 percent in March and 2.71 percent in April. The rate crossed to the next percentile in June at 3.41 percent.
September brought brokerage investors 3.92 percent, and the daily rate stood at 4.03 percent in mid-October. Pugh said the actual return to investors would be higher if compounding were taken into account.
One bank has been offering a special promotion in the Roanoke market involving money market deposit accounts, which permit writing of three monthly checks although the money can be obtained in person any time.
Excluding that bank, the range in rates in the Roanoke Valley last January was 2.53 percent to 2.84 percent on a deposit of $2,500. Last week the range was 2.53 percent to 3.15 percent - including compounding.
Banks here have bettered the national average, however. Bank Rate Monitor reported that the average bank was paying 2.3 percent on money market accounts just before the first tightening and in mid-October paid 2.5 percent.
It is usual for savings rates to lag other market-driven rates. After all, the securities and loans on which banks' earnings are based are for longer terms and retire only gradually over weeks and months.
Even local bank loan rates have not yet caught up with the 1.75-point climb.
Bankers say the lag results from market conditions and the fact that they are promoting more sophisticated accounts for bigger depositors instead of less glamorous money market deposit accounts.
Loan demand, while rising over the last couple of months, is still not up to its pace of a few years ago. That means banks have more deposits than they have demand for loans. So that means bankers are feeling no pressure to pay higher rates in order to attract money from depositors.
That may be changing, however. Monty Plymale, executive vice president of the southwestern region of Central Fidelity Banks, said the lag is due to "the marketplace and what we as a bank can provide."
Loan demand is rising, he said, but most consumers want a fixed interest rather than a rate that floats with prime. The same is true of deposits, he said, with more people seeking the certainty of a certificate of deposit over the floating money market account - even if rates are now moving upward.
Central Fidelity, he said, is trying to evaluate customer needs and demands. His bank has, therefore, raised the rates for CDs while keeping the money market account virtually stable. The latter, he added, may be repriced in the future.
Bruce Wright, senior vice president for product management at Crestar Bank, said that "loan demand has been fairly weak in Virginia." That means, he said, that banks don't have to gather dollars for balance sheet purposes to fund a demand for lending.
CD rates have tended to rise, he explained, because a bank can issue a six-month CD, then reinvest the money for six months at a higher interest rate. The bank makes money on the deal.
He expects CD rates to continue to rise as this marketplace interest goes up.
Money market accounts, on the other hand, are fully liquid because people can demand return of their money at any time. So a bank must invest those funds for a very short term where "the market is not as attractive." This has held down money market account rates.
Tiering is the new trend in money market accounts, Wright said. Rates go up faster - and more steeply - with the balance than in the past.
Up to $2,500, for instance, Crestar Bank last week paid a yield of 3.04 percent. This climbed to 3.14 percent up to $20,000, 3.35 percent over $20,000 and 3.76 percent over $50,000.
Customers with those balances "have alternatives," Wright said. In other words, those with large amounts of money can move into money market mutual funds. "We need to be competitive against those products as well," not just against other banks.
Eunice Graham, senior vice president of NationsBank's Virginia regional marketing group, said most customers have both CDs and money market accounts, the former for earning interest over a fixed period of time and the second for readily-accessible emergency cash. That's another reason banks emphasize rates on CDs.
It's also natural that banks lag the brokerage houses, Graham explained, because the bank accounts are fully insured by the government. The principal is never at risk.
In addition, she said, mutual funds usually carry fees or loads, which bank accounts do not. Banks have minimums to avoid fees, but mutual funds also carry minimum deposits.
NationsBank, she pointed out, has raised rates on $2,500 accounts from 2.53 percent in January to 3.15 percent in mid-October. The rate is 3.6 percent on balances over $10,000.
First Union Bank, like most others, also tiers its rates. Chuck Long, vice president marketing, said the traditional money market accounts have a spread of a half point to a full point, depending on the balance.
First Union, on the other hand, is pushing its so-called Cap account instead. Like a brokerage account, it holds all sorts of assets with its earnings swept daily into a money market fund. Unlike a brokerage account, it's fully insured by a federal agency.
The amount of assets required to get in? $15,000 - and it tiers up to $1 million. It also pays 1.35 more points than the money market account or about 4.35 percent.
The Cap account, Long said, is "exciting. We have tens of thousands of accounts. It's been very popular in Virginia."
Long also pointed out that most deposit rates lag the market down as well as up.
Rick Bowman, chief financial office of First Virginia Banks, said it has two different money market accounts.
The first, which carries a minimum of $1,000, is for smaller savers. It paid 2.53 percent in January and last week.
Then there's the insured investment accounts geared toward larger savers. The rate floats with the money market and the amount varies with the size of the deposit.
The system, he explained, gives depositers with smaller amounts an opportunity to earn interest without any charges so long as the account contains $1,000.
The insured money market account, on the other hand, is "competitive" with the mutual funds and bears interest that changes weekly.
Outside the size of the deposits and the interest, Bowman said, the accounts are identical with the same check-writing privileges.
Despite the higher rates for the investment account, Bowman said, First Virginia has more dollars in the first basic account. "Lots more people have smaller balances in their account," Bowman said.
by CNB