Comments on: Do CD Rates Rise Before Bank Failures?

By: Chris

Chris — Mon, 28 Dec 2009 22:41:30 +0000

You must watch their trends. If you have an institution that starts competing heavlily in the market (CD) when they used to sit on the sidelines you know they are hurting for cash (liquidity). Banks never want to increase their cost of deposits unless it is a last resort or major marketing campaign change.

By: Gene at www.kitchentablenomics.com

Gene at www.kitchentablenomics.com — Wed, 16 Sep 2009 16:50:14 +0000

As a business writer watching banks go through their 1980s jams and this one, I’ve found several reasons why banks may hike CD rates when their competitors don’t. Basically they’re raising money for special purposes. Those might be benign, such as raising money for pot load of anticipated construction loans, or not so benign, such as spackling over some capitalization problems they hope regulators won’t notice. Also, sometimes they may have more than one purpose in mind, which doesn’t help analysis at all. Unfortunately,I don’t have squat for statistics to show this clearly.

Always a pleasure reading you,

By: superdiamond

superdiamond — Wed, 16 Sep 2009 16:21:15 +0000

You can’t judge CD rates for bank failure. There are so many contributing factors. I believe it’s the bank fees and changing the rules a bit to get more money. Corus bank as your example lowered their cd rates lower and lower.

By: Jim

Jim — Wed, 16 Sep 2009 13:44:36 +0000

I agree, it’s not a lot of data to go on. WaMu had a greater reach so boosting the rates certainly increased deposits and Corus probably didn’t see it as a viable option.

If someone else has the data, I’d love to see a real statistical analysis to see how much of a correlation there is.

By: Curtis

Curtis — Wed, 16 Sep 2009 12:58:29 +0000

You’re right, of course, that CD rates alone can’t predict a bank failure. But it certainly can be one (of many…) indicators that a bank is struggling.

I’d think that the direction CD rates right before a failure is more indicative of the mindset of management. WaMu was a nationwide bank and probably thought that it could attract enough deposits to stay open, and worry about the higher amount it had to pay in interest down the road. Corus, a regional bank, more likely realized it’s limited market share didn’t really lend itself (pun intended to garnering large enough deposit amounts in CDs to stave off eventual failure. These are just guesses, of course, but they seem reasonable to me.

Based on two examples alone (WaMu and Corus) there’s really not much to go on. What would be interesting would be to see how many of the banks that have failed in the last year raised CD (and perhaps other) rates just before they went under and vice versa. A statistical analysis might give more weight to whether CD rates are a general indicator or not.