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When Banks Compete, Could Savings Account Win?

12/06/2011 12:56 pm ET | Updated Feb 05, 2012

Watching a couple of bankers duke it out wouldn't make anybody forget the Ali-Frazier fights, though it might draw some interest from the Occupy Wall Street crowd. Still, an escalating fight among banks for commercial loans might be worth the attention of anyone looking for positive signs about the economy.

American Banker reports that small banks are seeing more competition from big banks in their commercial lending markets. As a result, large banks are gaining market share in commercial loans at the expense of smaller banks. Here are four reasons this could be significant for the economy -- for better or worse:

  1. Loan growth could spur economic growth. Even record low mortgage rates have done little to spur loan volume, in part because banks have been reluctant to lend. This new competition could signal that some banks are ready to switch from defense to offense.
  2. If lending becomes more profitable, rates on savings accounts could rise. A growing loan business makes banks value savings accounts and other deposits more, because they provide capital for further lending. Over time, this would encourage banks to offer higher interest rates to depositors.
  3. Fighting over a limited market has its risks. On the negative side, intense competition over a limited slice of the loan market could encourage undue risk-taking. Commercial and industrial lending, which is the focal point of this competition, represents only 20 percent of the U.S. loan market. Some bankers are concerned that if too many players try to crowd into this segment of the market, they won't adequately account for risk.
  4. Smaller banks could be caught in a squeeze. Small banks have been able to compete for deposits by offering higher interest rates, but that makes them less able to offer competitive loan rates.

If this new spirit of competitiveness among banks leads them to expand the loan market, it could stimulate the economy and eventually lead to higher interest rates on savings accounts, CDs, and money market accounts. On the other hand, if banks are simply fighting more intensely over a stagnant market, this competition could lead to more risk-taking without growth.

The original article can be found at Money-Rates.com: