Ally Bank Made Significant Rate Changes

People always say good things will come to an end, but for Ally Bank, the good things lasted too short and the end came a little too fast.

Just two days ago, I praised Ally Bank for offering very attractive rates for its products, including savings account, money market account, and CD, when the trend for interest rates is down in general. Today, however, it seems that Ally Bank has adjusted their rates down quite significantly. For example, the rate for online savings account is now 2.05%, almost at the same level as Dollar Savings Direct. And the one-year CD rate is reduced to 2.49% from 2.80% and the rate for 9-month no penalty CD (the product that I am particularly interested in) is now 2.30%, down from 2.50% APY. The Money Market Account rate remains at 1.90% APY. The reason for the sudden rate change is that Ally Bank has been under pressure from American Bankers Association (ABA) for providing an interest rate that’s significantly above the national average. In a letter sent to the bank in late May, ABA President & CEO said (with my highlights):

GMAC Bank/Ally Bank is offering interest rates well above the market in order to attract those deposit. For example, according to Bank Rate Monitor for May 18, the national average rate on 6-month certificates of deposit is 0.99%. Ally Bank is advertising at more than double this national average, at 2.13%. Rates offered by GMAC Bank/Ally Bank for 1-year and 2-year CDs are generally the highest in the nation. At the same time, the bank’s public financial reports have shown the bank to be losing money with losses of $112 million for all of 2008, and losses of $133.5 million in the first quarter of 2009.

This aggressive deposit strategy is particularly egregious when it is used by a trouble bank in which the government holds a controlling interest. Such a bank is significantly shielded from investor and market influences that might otherwise act as a brake on risky financial strategies. In the case of GMAC Bank/Ally Bank, the Treasury Department, through the Capital Access Program, reportedly recently added $7.5 billion in capital to the $6 billion of federal money already invested in the firm.

We believe that the situation with GMAC Bank/Ally Bank is analogous to that contemplated in FDIC rules governing brokered deposits sought by troubled banks. Such banks would never be allowed to follow the aggressive deposit strategy being pursued by GMAC Bank/Ally Bank.

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Well, the message is loud and clear. Even though GMAC Bank has been offering rates that are significantly higher than its peers for a long time, the new Ally Bank can’t keep doing the same while receiving government bailout money. And it looks like the reason for Ally Bank’s rate reduction is exactly what I worried about in my previous post, that the national average rate the FDIC calculated will be used to limit interest rates offered by banks that are less well capitalized (apparently Ally Bank belongs to that category). In this case, ABA led the charge against Ally Bank. On one hand, the regulation is to protect consumers because a bank that is losing money should focus its effort on improving its balance sheet instead of paying extraordinarily high rate to attract new customers and giving the false impressions that the bank is financially strong, while on the other hand, regulating how much the interest rate a bank can pay its customers could end up hurt them if the bank’s competitors use the average rate to complain.

Anyway, too bad that I didn’t act quick enough to lock in the 2.50% APY for the 9-month no penalty CD when it was available. Now that the rate is lowered quite a bit, I have to reconsider whether to get an account or not, even though 2.30% APY is still pretty good.

Ally Bank Rates Summary

The following are the up-to-date rates for Ally Bank products.

Ally Bank Rates Effective -
Duration Rate
3 Month High Yield CD
6 Month High Yield CD
9 Month High Yield CD
12 Month High Yield CD
18 Month High Yield CD
2 Year High Yield CD
3 Year High Yield CD
4 Year High Yield CD
5 Year High Yield CD
11 Month No Penalty CD
Online Savings Account
Money Market Account

 

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