It seemed like a perfectly good contrarian theory.

Driven by a demand for deposits, and bolstered by funding from the Troubled Asset Relief Program, the 19 largest banking companies in the country would break with tradition and pay higher-than-average interest on certificates of deposit and money market accounts.

But then Market Rates Insight, a research firm in San Anselmo, Calif., ran the numbers and found it wasn't true. Score one for the big guys' perceived stability over smaller competitors' higher rates, experts say.

According to the firm's report, the national average rate for a one-year CD was 1.2% for the top 19 banks, compared with an average rate of 1.62% for 1,300 other banks, during the Jan. 16-May 26 period. For money market accounts up to $100,000, the top 19 banks' national average was 0.53%, compared with 0.78% for the other banks.

"There was a notion that those 19 banks can afford to offer higher rates because they received Tarp money, but it was not supported by our analysis," said Dan Geller, executive vice president at Market Rates Insight. "Possibly customers are willing to trade a little bit on rate for some type of assurance that the top 19 banks are in the category of 'too big to fail.'"

For the rest of the country's banks, competing against perceptions about security among that "too big too fail" category may prove challenging, Geller said. However, there are opportunities for smaller banks to compete by touting the local angle, and of course, on price to attract rate-sensitive customers.

"But the question then becomes, how much annual percentage yield variance does it take to sway a customer to overcome this perception that one bank is more stable than another — is it 10, 25 or 50 basis points?" Geller said.

Steve Turner, a managing director at Novantas in New York, said that some may have initially thought the top banks receiving Tarp money were overly stressed and needed to offer higher rates to attract more customers, but media reports throughout the winter and spring proved that strong banking companies like JPMorgan Chase & Co. and State Street Corp. were forced to take the capital and were not that stressed at all.

Though the top 19 banks were stress-tested, the government's results were published in May, and likely did not affect the rates charged by these banks during MRI's study, consultants said.

Big banks might also have been able to offer lower rates on their deposit products because their advertising budgets are larger, and they can flood the market with more ads in newspapers, radio and TV that capture the attention of more people, Geller said.

Not all deposit pricing consultants were surprised that the largest banks continued to offer lower-than-average rates, despite the fact that they received the most substantial capital from the government.

"Banks don't pay a higher rate because they can afford it; it would be because they would have to, because they didn't have any other source of funding," said Aaron Fine, a partner in the retail and business banking practice at Oliver Wyman Group, a New York management consulting unit of Marsh & McLennan Cos.

Larger banks typically can draw in more low-cost deposits in checking accounts, from both retail customers and commercial customers, than smaller banks can, Fine said.

Consequently, many smaller banks have to pay up for deposits to be able to fund their loans.

However, that may not be a problem for many smaller banks, because they can charge more for loans, said Tom Brogan, a research director at TowerGroup Inc., an independent research firm owned by MasterCard Inc.

"Larger banks, particularly those focused on commercial lending, have smaller margins because large commercial borrowers normally can negotiate lower rates, versus smaller banks with smaller business customers," Brogan said. "Therefore, larger banks try to fund their loans with less pricey deposits to maintain their spreads, whereas many smaller banks can afford to pay higher deposit rates."

Not all smaller banks pay up for deposits, said Bert Ely, a banking consultant in Alexandria, Va. Those who remain profitable and aren't hurting for funds want to keep deposit costs down as much as possible, so margins won't be squeezed further.

Novantas' Turner agreed, adding that these banks typically prefer to offer "relationship" products such as checking and savings accounts and online bill pay to create stickier customers.

"They are focusing on building long-term ties to those customers, so when we get through this stressed environment, people will stay with them and expand their business," Turner said.

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