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Could Your Yield Be Better?


Interest on bank deposits can vary widely, but if you go looking for a better deal, learn first how to administer your own stress test

About $4 trillion in wealth is currently idling in U.S. money market accounts earning an average of 0.33%. Such puny rates are encouraging some intrepid souls, reassured by the FDIC's deposit insurance of up to $250,000 per account, to venture into higher-yield savings and checking accounts. But these deals come with strings attached and a variety of risks. You may find yourself banking with institutions that are less than rock-solid, with teaser rates that drop almost immediately, or with rigid qualifications that void the rate if you don't measure up.

That said, the math is hard to resist. On a $25,000 deposit, raising the interest rate 2 percentage points yields an additional $500 a year. "If you're going to work hard to squirrel away money for a rainy day, do yourself a favor and make sure you're getting a competitive return," says Bankrate.com (RATE) analyst Greg McBride.

Some of the best deals are available only on a limited basis. With some community banks, you have to walk into the branch to open an account. And credit unions may require that you live in a certain state or work for a particular company.

Web sites such as Bankrate.com point visitors to deals available nationally. For example, a money market account at Intervest National Bank (IBCA) in New York offers 2.47% on deposits of $2,500 or more. But rates aren't written in stone: According to BankDeals, a financial blog, 26 banks dropped their high-yield rates the week of Mar. 9.

The highest rates often come with the toughest requirements. On CheckingFinder.com you can find a rate of 4.01% from the Community Bank of Raymore, in Raymore, Mo. But you must use direct deposit, make 10 debit-card purchases a month, and get statements online. Ignore these stipulations, and the interest rate drops to 0.1%.

Of course, you'll lose your great interest rate if your bank goes under, notes Martin Weiss of Weiss Research. To gauge a bank's soundness, it's possible to run an abridged version of the FDIC's stress test. Suppose you are thinking about GMAC Bank, which offers a rate of 2.47% on deposits. From its balance sheet you can calculate something called the tangible capital equity ratio. Tangible capital is the value of everything the company could sell at a liquidation. You get this by deducting intangibles like goodwill from total assets. To find the ratio, divide that number into the shareholder equity—the cash left after all liabilities are paid. For GMAC, the ratio is 11%, well above the 4% many consider safe. GMAC's assets, too, are relatively sound: Only 2% of its loans are more than 90 days past due. But here's the possible deal-breaker: The bank's earnings, expressed as return on assets, come to a loss of 35 cents on the dollar.

Bankrate.com, The Street Ratings, Institutional Risk Analytics, BauerFinancial, and other Web sites run their own stress tests. The trouble is, they don't always agree. Bankrate.com says GMAC merits four stars, one below its top rating; BauerFinancial gives it three, calling it "adequate"; Institutional Risk Analytics, citing GMAC's exposure to consumer lines, gives it an F. Weiss's advice is to err on the side of caution. "There are so many banks out there. Why opt for an institution that has even one low rating?"

Levisohn is a staff editor at BusinessWeek covering finance and personal finance.

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