May 7, 2022 / VOLUME NO. 208


Much Ado About Bank Competition

This year, I decided to spring clean my accounts. I moved to a different megabank and consolidated several accounts at two online-only banks into a third online-only bank.


Why did I go through the hassle of opening similar types of accounts at similar types of banks? For me, it came down to competition and interest rate. 

While the prospect of rapidly rising interest rates bodes well for the asset side of bank balance sheets, there’s another threat looming in that scenario. Banks could lose important deposit relationships if customers decide to move elsewhere for higher rates. 

A recent academic paper looked at how community banks treat long-term deposit customers and sadly, it seems many of them are taken for granted. Relationships are “detrimental to deposit customers,” wrote researchers from the Federal Deposit Insurance Corp. and the University of South Carolina. Their data set included over 800,000 individual insured certificate of deposit accounts from 536 U.S. banks with less than $10 billion in assets between 1998 to 2017. They found that the longer a certificate of deposit stayed at a community bank, the lower interest rate it received. 

“We find that an existing depositor relationship benefits the bank and not the CD customer,” wrote Allen Berger, Troy Kravitz and Lynn Shibut. “Banks pay lower spreads to depositors with existing transaction accounts.”

The research comes with several wrinkles: The researchers used a data set exclusively of failed banks and acknowledged that those banks may not represent community banks broadly. The paper focused solely on insured CDs because interest earned is the only feature of these products, and the insurance coverage means they were less likely to leave a failing bank.

All that aside, research demonstrating that community banks don’t tend to reward long-term depositors will be increasingly relevant as interest rates continue rising. Banks are still awash in deposits — which will probably suppress competition for deposits. And while most long-term bank customers won’t notice, this one did. That could pose risks for banks in the months ahead.

• Kiah Lau Haslett, managing editor of Bank Director


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