Best savings account interest rates are never at the safest banks

The uncertainty in the sector is likely to set off a bidding war for savers in which smaller online or regional banks jack up interest rates.

Right now, many bank customers are less concerned with the return on their money than with the return of their money. As such, the biggest financial institutions — which tend to offer low interest rates to savers — are raking in deposits following the collapse of Silicon Valley Bank and Signature Bank.

The uncertainty in the sector is likely to set off a bidding war for savers in which smaller online or regional banks jack up interest rates in an attempt to persuade savers to stay or come back; and could in turn lead some less-ethical players to dupe customers about what they’re really offering. That means regulators and savers both need to use some extra vigilance.

Clearly, those who are fleeing smaller banks don’t care about the big banks’ stubborn refusal to increase rates. At Chase, savings accounts still pay just 0.01 percent, at Citibank, standard rates are 0.05 percent and at Wells Fargo, they’re 0.15 percent. Meanwhile, the average online savings account payout is 3.55 percent, and many lenders are offering more than 4 percent, based on data from DepositAccounts.com.

With more consumers opting for safety over yields, the big banks will be even less inclined to increase their savings account rates. They’re still sitting on $19.2 trillion in deposits overall — well-above pre-pandemic levels despite seeing more withdrawals over the last few quarters.

To persuade risk-averse depositors to come back, regional and online banks will have to up the ante. But how much is too much in the ensuing battle for cash? Savers shouldn't settle for the big banks’ insultingly low rates, but post-SVB, they also shouldn't be reaching for the tippy-top in terms of yields.

If a bank is offering a yield that seems too good to be true, it may be because they’re desperate. Remember, Washington Mutual was offering one-year CDs at 5 percent just a month before it failed (a rate that far exceeded those from other banks at the time, according to Ken Tumin, founder of DepositAccounts.com). Yes, JPMorgan ended up acquiring WaMu and honoring those 5 percent CDs for a time, but it’s a gamble to assume history will repeat itself.

Some have argued that regulators have effectively given depositors the green light to invest large sums and chase the highest yields by stepping in and making all SVB and Signature depositors whole, including those beyond the $250,000 threshold. But if other banks were to fold, it seems overly optimistic to think all depositors would be covered ad infinitum beyond the $250,000 limit set by the Federal Deposit Insurance Corp. Nor can depositors expect that every struggling bank will find a buyer.

That doesn’t mean a saver should settle or give up on higher rates altogether. But some extra caution is warranted. Promotional rates may have minimum balance requirements, fees tacked on if a certain balance isn’t maintained, or a cap on how much interest can be earned.

As offers from online or smaller banks come in, depositors should ensure the bank has FDIC insurance directly, not through a “partner bank.” As long as it’s FDIC-backed, coverage is guaranteed up to $250,000 per depositor — in other words, joint accounts are guaranteed up to $500,000. Since 1933, all depositors at failed banks have been made whole up to insurance limits.

A bidding war for savers could be a good thing. It’s not really regulators’ place to set a ceiling (or floor) on banks’ offered rates; that’s something best left to the market.

Where regulators should play a role is in ensuring banks can manage their risks and have enough capital to absorb unexpected losses, says Amiyatosh Purnanandam, a finance professor at the University of Michigan.

And as the bidding war heats up, regulators should require fintech and other non-banks to make it blatantly clear when consumers are not covered by FDIC-insurance. Ultimately, that’s how consumers will be protected, regardless of what they’re earning on a savings account.

Alexis Leondis is a Bloomberg Opinion columnist covering personal finance. Views are personal, and do not represent the stand of this publication. 

Credit: Bloomberg