The fear and uncertainty that came in the wake of a string of regional bank failures this spring has had a silver lining for investors—higher rates on bank deposits.
The collapse of Silicon Valley, Signature, and First Republic regional banks in March and May put upward pressure on CD rates, experts say, at a time when rates were already surging because of the Federal Reserve’s campaign of anti-inflation interest rate hikes. For example, on Saturday, March 11, the day after Silicon Valley Bank failed, Ally Bank raised the rate offered for its 11-month no-penalty CD to 4.75% from 4%, USA Today reported.
Banks offer higher yields on things like savings accounts and CDs when they want to attract deposits, and the failures of regional banks gave banks a major incentive to shore up their finances to prevent the kind of bank run that brought down SVB, Eugenio J. Alemán, chief economist at Raymond James told Investopedia in a May interview.
While the turmoil in the banking system has eased—it’s been more than a month since First Republic bank imploded, with no more failures since then—the high rates have remained. As of June, depositors could earn a 5.5% or more APY on the highest-yielding certificates of deposit, unthinkably high rates compared to a few years ago when interest rates were at rock bottom. As recently as October 2021, the top rate was only 1.35%, according to data collected by Investopedia.
The best interest rates are generally available at smaller and online banks and credit unions. While investors may be nervous about the safety of their money at smaller banks, experts say the money is safe as long as it’s covered by the Federal Deposit Insurance Corporation, which guarantees deposits up to $250,000.
Rates are mainly elevated because the Federal Reserve has raised its benchmark fed funds rate from near-zero to a range of 5%-5.25% since March 2022, in an effort to slow the economy and combat inflation. Because of those high rates, banks can earn an average 5.06% interest on money they deposit with the central bank overnight, giving them a lot more leeway to offer higher rates on things like CDs and savings accounts.
