There is a lesson in the recent decision by six New York City banks to drop out of the competition for the city's banking business.

The banks said the cost of detailing their community investment activities in the depth required by New York's "economic justice program" would far exceed the profit that city business could bring. So why bother competing?

This is by no means the first time that bankers have found serving public bodies to be too costly.

Many banks stopped fighting for state and local deposits when they found that the pledged-security requirements would cost far more than the account was worth.

|No Wonder!'

I remember a banker in York, Pa., bragging to me that his bank had gotten a major account from the state.

At that time, the state required triple pledging -- that is, $3 tied up in pledged securities for each $1 of deposits received.

When I discussed this wrinkle with the banker, his enthusiasm faded. "No wonder the Philadelphia banks let me get the business!"

But requirements for excessive reporting, unusual community service, or tremendous pledging are not the only reasons for bankers to consider the motto "Just say no."

Buying Smart

Even in day-to-day solicitation, reaching too far -- putting growth ahead of profits -- has caused an awful lot of unnecessary pain.

Among practices that bring profits, many acute bankers would give a star role to buying deposits inexpensively.

As banks recover from the dark days of the late 1980s and early 1990s, those at the top are paying rates like 2% on NOW accounts.

These banks are not offering higher rates to reach for deposits if there is no good use for them.

And this kind of thinking forces banks to make important decisions of another kind.

Some have simply decided to become smaller. If lower rates lead to decline in deposits, and if this means the banks lack the resources to meet their loan demands, the solution is to generate loans, package them, and sell them.

Settling for a Share

Other banks have taken a different tack, trying to keep the savings under their control by offering different packages of savings vehicles. Notable among these are investments and annuities that can offer higher rates even if these products lack federal insurance.

Though the funds can flow through to nonbanks, "at least we get part of the action," these bankers reason.

Meanwhile, strong efforts are made to make sure the customers know just what they are getting -- products without FDIC insurance and the risklessness of a bank deposit.

I hope the banks that are offering annuities know an awful lot about the insurance companies they are using. A sales load of 8% may not be worth the risk if the annuity issuer gets into trouble.

Who Says They Are Low?

The bank's reputation could be badly tarnished. Despite warnings, customers would blame the bank, not the annuity issuer, which might be thousands of miles away.

A third approach, which more banks should take, is to use some of the marketing budget to help explain to the public that today's rates are really not very low!

No, this does not involve magic or lying. Look at it this way:

* When the bank paid 14% and 15%, the inflation rate was about 18%.

* Today, even the low rates available on deposits are much closer to the rate of inflation.

In sum, for the first time in over 40 years the savings rates are set to reward the saver, rather than to attract the borrower. The days of low ceilings to keep rates attractive for borrowers, even if savers were seriously hurt, are over.

A bank should try to explain this to people who grumble about the decline in CD yields. Mr. Nadler is a contributing editor of the American Banker and professor of finance at the Rutgers University Graduate School of Management.

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