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Impact on Consumers to Be Small

The Wall Street Journal

Banks that need to raise capital following government stress tests could offer higher rates on deposits but also increase fees for customers, while banks deemed healthy may not offer as many good deals.

In some cases, banks could sell off noncore businesses, such as mutual-fund operations, leaving customers of those businesses to decide if they want to stick with the new owners.

Bank of America Corp., which needs to raise $34 billion, has already announced it will sell private First Republic Bank and is considering the sale of other business units, including asset manager Columbia Management, which runs funds such as Columbia Acorn International and Columbia Value & Restructuring.

The government has made clear that the biggest banks like BofA or Citigroup Inc. won’t be allowed to fail. That isn’t true of a number of smaller banks that weren’t included in the stress test. More than 30 banks already have failed this year, and dozens more are likely to be taken over by regulators because of rising loan losses.

But, even in bank failures, depositors won’t lose money unless their accounts exceed the $250,000 insurance limit from the Federal Deposit Insurance Corp. If a husband and wife have a joint account, the limit rises to $500,000. On top of that, many banks participate in special programs where even larger sums are spread among several institutions so depositors retain FDIC insurance for the entire amount.

The stress test could have one benefit for some rate-conscious depositors. Banks required by the government to raise more capital may roll out higher rates to lure deposits, says Dave Kaytes, managing director at Novantas. “We’ll see rates for those banks get a lot more aggressive,” he says.

By contrast, stronger banks that passed the stress test may offer lower rates. Says Mr. Kaytes: “Those types of institutions are going to take advantage of the ‘Good Housekeeping seal of approval’ and be a little tighter with their rates, while the others will be more aggressive with raising deposit rates.”

There will be other lingering effects of the squeeze on the banking industry. In the short-term, both corporate and individual customers will have a harder time getting loans, says Jim Eckenrode, banking research executive at TowerGroup.

Banks already have been raising interest rates on credit cards and dropping credit lines. The trend of banks’ cutting back on credit lines and raising rates “will remain in force until there is greater prohibition on doing so,” says Greg McBride, senior financial analyst at Bankrate.

For more information, contact Novantas Marketing

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