Rise in Short Term Interest Rates - Get Ready (AP)

Regulators tells banks to prep for higher rates
By JEANNINE AVERSA
AP Economics Writer

Financial regulators told banks Thursday to have procedures in place to minimize their risks from loans when rock-bottom interest rates start to rise.
The advisory came from the Federal Financial Institutions Examination Council, which includes the Federal Reserve, the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency and the Office of Thrift Supervision.

The advisory wasn't meant to signal any upcoming change in interest-rate policy by the Fed.

To nurture the budding recovery, the Fed has slashed a key bank lending rate to a record low near zero, where it has been for a year. When the economy is on firm ground, the Fed at some point will start boosting rates. Some economists think the Fed might begin to raise rates later this year to safeguard against any inflation problems.
It's unusual for the council to issue such an advisory. The last time it did so was in 1996, a Fed spokeswoman said.

"In the current environment of historically low short-term interest rates, it is important for institutions to have robust processes for measuring and, where necessary, mitigating their exposure to potential increases in interest rates," the council said in the advisory issued Thursday.

Higher interest rates make it more expensive for banks to borrow and increase their costs of doing business. The council suggested that banks make sure they have sufficient capital cushions to protect against any possible losses.

"In this challenging environment, funding longer-term assets with shorter-term liabilities can generate earnings, but also poses risks to an institution's capital and earnings," the council said.

The council said banks should be testing their risk-management systems for scenarios including instantaneous and significant changes in interest rates.

Deficiencies in banks' risk-management systems - along with lax regulation - have been blamed for contributing to the financial meltdown. The crisis, the worst since the 1930s, was triggered in 2007 when home mortgages soured as the housing market collapsed.

Why Are CDs, Money Market Rates So Low? (NY Times)

December 26, 2009
At Tiny Rates, Saving Money Costs Investors
By STEPHANIE STROM
Millions of Americans are paying a high price for a safe place to put their money: extremely low interest rates on savings accounts and certificates of deposit.

The elderly and others on fixed incomes have been especially hard hit. Many have seen returns on savings, C.D.’s and government bonds drop to niggling amounts recently, often costing them money once inflation, fees and taxes are considered.

“Open a Savings Plus Account today and get a great rate,” read an advertisement in the Dec. 16 Newsday for Citibank, which was then offering 1.2 percent for an account. (As low as it was, the offer was good only for accounts of $25,000 and up.)

“They’re advertising it in the papers as if they’re actually proud of that,” said Steven Weisman, a title insurance consultant in New York. “It’s a joke.”

The advertised rate for the Savings Plus account has expired, according to the bank’s Web site; as of Friday, the account paid an interest rate of 0.5 percent. The bank’s highest-yield savings account, the Ultimate, was paying 1.01 percent.

The best deal Mr. Weisman has found is 2 percent on a one-year certificate of deposit offered by ING Direct, an online bank that has become a bit of a darling among the fixed-income crowd.

Interest on one- and two-year Treasury notes was just 0.40 percent and 0.89 percent, as of Monday. Bank of America offers 0.35 percent on a standard money market account with $10,000 to $25,000, and Wells Fargo will pay 0.05 percent on a basic savings account.

Indeed, after fees are subtracted, inflation is accounted for and taxes are paid, many investors in C.D.’s, government bonds and savings and money market accounts are losing money. In fact, Northern Trust waived some $8 million in fees on money market accounts because they would have wiped out all interest, and then some.

“The unemployment situation and the general downturn in the economy had an impact, but what’s going to happen now as C.D.’s mature is that retirees and the elderly are going to take anywhere from a half to three-quarters of a percent cut in their incomes,” said Joe Parks, a retired accountant in Houston on the advisory board of Better Investing, an organization that works to help people become savvier investors. “It’s a real problem.”

Experts say risk-averse investors are effectively financing a second bailout of financial institutions, many of which have also raised fees and interest rates on credit cards.
“What the average citizen doesn’t explicitly understand is that a significant part of the government’s plan to repair the financial system and the economy is to pay savers nothing and allow damaged financial institutions to earn a nice, guaranteed spread,” said William H. Gross, co-chief investment officer of the Pacific Investment Management Company, or Pimco. “It’s capitalism, I guess, but it’s not to be applauded.”
Mr. Gross said he read his monthly portfolio statement twice because he could not believe that the line “Yield on cash” was 0.01 percent. At that rate, he said, it would take him 6,932 years to double his money.

Many think the Federal Reserve is fueling a stock market bubble by keeping rates so low that investors decide to bet on stocks instead. Mr. Parks of Better Investing moved more money into the stock market early this year, when C.D.’s he held began maturing and he could not nearly recover the income they had generated by rolling them over.

He began investing some of the money in blue chip stocks with a dividend yield of at least 3 percent and even managed to find an oil-and-gas limited partnership that offered 8 percent.

Mr. Parks said, however, that he would not pursue that strategy as more of his C.D.’s matured. “What worked in the first quarter of this year isn’t as relevant, because the market has come up so much,” he said.

No one is advising a venture into higher-risk investments. Katie Nixon, chief investment officer for the northeast region at Northern Trust, said that, in general, “no one should be taking risks with their pillow money.”

“What people are paying for is safety and security,” she said, “and that’s probably just right.”

People who rely on income from such investments for support, however, are being forced to consider new options.

Eileen Lurie, 75, is taking out a reverse mortgage to help offset the decline in returns on her investments tied to interest rates. Reverse mortgages have a checkered reputation, but Ms. Lurie said her bank was going out of its way to explain the product to her.

“These banks don’t want to be held responsible for thousands of seniors standing in bread lines,” she said.

Such mortgages allow people who are 62 and older to convert equity in their homes into cash tax-free and without any impact on Social Security or Medicare payments. The loans are repaid after death.

“If your assets aren’t appreciating and aren’t producing any income, you’re getting eaten up in this interest rate environment,” said Peter Strauss, a lawyer who advises the elderly. “A reverse mortgage is one way of making a very large asset produce income.”

Eve Wilmore, 93, has watched returns on her C.D.’s drop to between 1 percent and 2 percent from about 5 percent a year or so ago. Yet the Social Security Administration recently raised her Medicare Part B premium based on those higher rates she had been earning. “I’m being hit from both sides,” Mrs. Wilmore said. “There’s some way I can apply for a reconsideration, and I’m going to fight it. I have to.”

She said she was reluctant to redeploy her money into higher-risk investments. “I don’t know what my medical bills will be from here on in, and so I want to keep the money where I can get to it easily if I need it,” she said.

Peter Gomori, who taught a course on money and investing for Dorot, a nonprofit that offers services for the elderly, did not advise his students on investment strategies but said that if he had, he would probably have told them to sit tight.

“I know interest rates are very low for Treasury securities and bank products, but that isn’t going to be forever,” he said.

But investment professionals doubt rates will rise any time soon — or to any level close to those before the crash.

“What the futures market is telling me,” Mr. Gross said, “is that in April 2011, these savers that are currently earning nothing will be earning 1.25 percent.”

FDIC Warns on Foreclosure Scams, Extends Extra Protection

Buyer Beware: Tips from the FDIC on How to Protect Against Foreclosure Frauds, Easy Money Schemes and Other Costly Deals
Other topics in the latest FDIC Consumer News include the extension of $250,000 deposit insurance, more about mortgage modification programs, and shopping for a CD

Many people concerned about their mortgage, their job or their finances may be especially vulnerable to scams and other costly “fixes” for their problems. The Federal Deposit Insurance Corporation today issued a variety of tips to help consumers be on guard financially in the current economy, in areas ranging from foreclosure rescue and loan modification scams to deceptive offers of FDIC-insured certificates of deposit (CDs). The advice was published in the Spring 2009 issue of FDIC Consumer News, the agency’s quarterly newsletter for consumers, which can be read or printed online at
www.fdic.gov/consumers/consumer/news/cnspr09.
Other timely articles describe the extension of the temporary federal deposit insurance limit of $250,000 per depositor through December 31, 2013, more details about the Obama Administration’s program for lowering monthly mortgage payments through refinancing opportunities and loan modifications; various tips on shopping for a CD; and an FDIC legal opinion clarifying the deposit insurance coverage of a pre-paid card if the bank holding the money for the card fails.

FDIC info on the new higher deposit insurance coverage

Multiple Certificates of Deposit (CDs), each with a different bank, can be held within your brokerage account. Each CD is covered by its own separate FDIC guarantee ($250,000 for each).