Bankers Discover Silver Lining In The Clouds Over Wall Street

Posted: October 31, 1987

While investment firms mourn their market losses, bankers are gleefully counting the cash that is flowing into their certificates of deposit and money-market accounts.

Those familiar with an earlier market disaster might find this ironic. For when the stock market crashed in 1929, lines of panicked bank depositors demanded their cash and forced many banks to fail.

Not so the crash of 1987. Today, bank deposits up to $100,000 are insured by the federal government, making runs on banks unlikely.

"Banks are benefiting from the crash," said Bob Kung, senior vice president of PSFS, where a new money-market fund grew from $100 million on Oct. 15 to $277 million on Oct. 26, seven days after the crash.

"Banks are more stable now than in 1929," Kung said. "People realize that banks are the best place for their money now."

Banks and thrifts across the nation report a surge of interest in, and cash flowing into, short-term CDs and money-market accounts. Many are fueling interest with television and newspaper ads that tout the safety and security of bank certificates and their tempting rates.

But some suggest that banks are taking advantage of the situation to lock in deposits at current rates, while expecting that economic turblence down the road might force rates back up.

"Banks are stressing their safety like mad and are exploiting the new vulnerability of Wall Street and of people concerned about the security of their money," said Robert Heady, publisher of Bank Rate Monitor, a newsletter based in West Palm Beach, Fla., that tracks weekly changes in interest rates.

"The sensible move is to do one of two things," said Heady. "A consumer should find the highest rate on a federally insured money-market account at a bank or thrift or lock it up in a short-term certificate of 30 or 90 days."

Short-term certificates usually carry higher interest rates than money- market funds, but the rate is fixed for the term, unlike money markets, which generally fluctuate with the Treasury-bill rate. Certificates cannot be withdrawn early without substantial penalty; money-market funds are more accessible.

The shock of the 508-point market decline on Oct. 19, combined with the subsequent drop in the rate that banks charge major corporate borrowers from 9.25 percent to 9 percent, has triggered a new downward trend in savings rates.

Five days before Blue Monday the Bank Rate Monitor discovered that major banks across the nation had raised their rates on certificates of deposit and had begun pulling in deposits. In fact, the ratio of bank-rate increases ''skyrocketed," Heady said, with 246 banks increasing their rates for every one that made a reduction.

Last week, the trend reversed, with three banks decreasing their rates for every one that increased them, according to Bank Rate Monitor's national survey. "Savings yields will probably continue to fall into December," Heady said.

This is both good and bad for consumers. While savings rates are declining, mortgage rates also are expected to decline.

The average rate of a 30-year fixed mortgage offered by 50 major banks declined to 11.39 percent from 11.77 percent last week - the biggest single- week decline in more than two years, according to Heady. In the Philadelphia area, fixed rates dropped from 11.53 percent to 11.24 percent, according to the Mortgage Reporting Service Inc. in Jenkintown.

"Mortgage rates are definitely going to follow the downward drop in savings rates, which is some consolation for home buyers who couldn't qualify at the higher rates," Heady said.

The decline in rates comes at a time when many may be flush with cash and

uncertain about where to put it. Stockholders who got out of the market on Oct. 19 would have received their settlement checks only last week.

But plenty of banks are pushing parking places.

Provident National Bank, Fidelity Bank and First Pennsylvania Bank each are heavily marketing their CDs or money-market accounts and report a significant inflow of cash, although the banks declined to give specifics.

Using television ads that feature a diaper-clad infant, Fidelity is promoting a rising-rate CD, starting at 6.9 percent, that is guaranteed to increase a quarter of a percentage point every six months for up to two years. The inference, of course, is that you can bank on your money growing.

Provident's ads for its money-market accounts are designed to pull in cash while reassuring nervous savers: "If you feel like you're watching a

financial roller coaster, relax. There is a place where your money can be safe and earn competitive rates." Last week, the Provident's money-market account carried a rate of 5.4 percent.

But someone willing to do some shopping around may find even higher rates.

While the average yield on money-market accounts nationwide is 5.84 percent, some institutions nationally offer accounts that yield as high as 8 percent, according to the Bank Rate Monitor. The yield is slightly higher than the rate because of the effects of compounding.

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