The average bank rate on all maturities is now at their low point of the year.  The driving forces behind the low rates is varied.  Loss of competition with continued bank closures by the FDIC is contributing mildly to this situation.  Excess reserves held by banks due to low lending activities contribute to low banks rates due to lower demand for bank deposits.  Fed forecasts for continued low Fed Funds rates and inflation rates are also contributing to an overall low interest rate environment.

FDIC bank closures have shut down a number of banks in 2010 that have been frequent providers of high yielding certificates of deposit.  UFB Direct was one of the most recent casualties.  The FDIC closed Waterfield Bank, the operator of UFB Direct, on March 5th, 2010 and is returning depositors funds since no other financial institution was willing to acquire the bank.  Imperial Capital Bank offered high yielding bank CDs and was shuttered in December of 2009.  AmTrust Direct and First Fed Direct were taken over by the FDIC and subsequently sold to new banks in the past 3 months.  These banks continue to offer competitive CD rates after their sale to other institutions albeit, at somewhat lower rates.  La Jolla Bank was frequently found on the top national CD rates and was also sent into receivership and sold by the FDIC.  In all, 32 banks have been closed by the FDIC so far this year.  The pace of bank closings is well ahead of last year’s pace, when only 17 banks were sent into receivership by the FDIC by this time last year.

Though there is constant chatter by financial analysts about rising interest rates, not only have higher rates not materialized but the Federal Reserve chairman speeches consistently focus on low inflation rates and a low fed funds rate.  In the January FOMC meeting, the FOMC reiterated the low rate calls and said it anticipates keeping the fed funds rate in the targeted range of zero percent to one quarter percent for an extended period of time.

Banks low lending levels further leads to low demand for depositor funds.  Bank reserves have skyrocketed in the past six months as funds flowed into banks and banks curtailed lending activities.  At the end of February, total bank reserves in millions of dollars stood at $1,253,692.00 while at the February 2009 number was $699,935.00.  Non required reserves ( excess reserves ) held by banks has risen as well, going from $643,449.00 to $1,192,272.00.  Looking at reserve data compiled by the Fed, there has never been a time in history when bank excess reserves have exceeded required reserves by this magnitude.  This is worth repeating, there has never been a time when excess bank reserves were this high – not even  close.

The apparent divergence in interest rate expectations by the Fed and by private sector economists is primarily based on the different views in the driving forces of interest rates.  The Fed expects rates to remain low and inflation to remain low due to low lending demand.  Other economists are looking at rising rates mostly based on the large amount of government debt and impending inflation.

Supporting the theory the lending activity will remain low and credit tight, is research performed by the Federal Reserve Bank of St Louis.  In a recent Fed paper reviewing recessions of the past concluded that recessions associated with financial crises have been more severe and longer lasting than recessions associated with other shocks.  Recoveries from these recessions have been typically slower and are associated with weak domestic demand and tight credit conditions.  This certainly paints a picture of low bank rates in the foreseeable future.

The key gauges to watch for now are the Fed Funds rate and Treasury rates.  Once the Fed Funds rate starts to rise, banks will follow by raising deposit rates on savings accounts, money market accounts and CD accounts.  Rising Treasury rates will indicate investor concern for higher inflation rates which will also drive bank rates higher.  For now the Fed Fund rate remains low and Treasury rates continue in a very tight range.

Rambling check was turned off for this article.  A coherent conclusion will be drawn another day.

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