Consumers Face Weakened Banking Power

For seven months prior to the release of the August Credit Power Index, a system that tracks the banking power of consumers by measuring the difference between loan rates and deposit rates compiled by the money management information source MainStreet and the financial industry data expert RateWatch, interest rates on CD were showing slight but consistent improvement.

However, the latest Credit Power Index data reveals a reverse in the trend. Meaning when the index goes up, it means that the interest consumers are paying on loans is significantly higher than the interest rate they are receiving on deposits.

“The national Credit Power Index may have hit bottom last month,” says the general manager of RateWatch, Rachelle Zorn. Her statement suggests that an end to the great consumer environment at banks may be close at hand.

However, the notion of what makes a “great environment” is entirely relative, as interest rates on savings products such as CD’s have been dismal for quite some time.

The current sorry interest situation can be blamed upon the government. “The low Fed funds rate is the real driver here,” says Maria Cappellano, a portfolio manager at investment management firm Eaton Vance who focuses on short term instruments, according to Main Street.

“It’s really an anchor for short-term CDs and deposits.”

Despite the fact that any return investor can expect to receive upon such CD’s and deposits are drowning, many Americans are choosing to take the safer route of wealth preservation over the riskier and much more precarious path of growth investing. What this means is that much of people’s money will continue to be shuttled into these rather unappealing but secure instruments.

“Do I want to have my money in prime money market funds with exposure to the European debt crisis? Or should I put my money in an FDIC-insured CD at the local bank?” Cappellano proposes that investors are asking themselves, as per Main Street’s reporting. “The mindset of consumers is that they’re looking for this cash to be safe, and they’re mostly concerned with capital preservation than an income base.”

The only bright side is for people looking to borrow money because, should they qualify, they could get a great rate on a loan at the moment.

Despite the grim return money put into savings accounts and Certificates of Deposit these days, it is important that consumers don’t abandon setting some money aside in order to establish an emergency fund.

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