Shop for Interest Rates
Banks are just like any other business enterprise. They also need to advertise themselves to attract new clients. One very sure-fire way that never fails to win new customers is by offering attractive deposit rates. A wise depositor should not be enticed by rates alone but should look at the overall state of the bank like its financial statements which are publicly available. A good bank offers good rates in addition to having a solid balance sheet on its books. This means it is financially solid with hardly any bad loans or other toxic assets that may pose a threat to its stability. Nowadays, it is very easy to compare deposit rates, such as term deposits because the time period pertaining to the deposit is comparable. For example, Bank A may offer 5 percent for 500 British pounds term deposit for six months while Bank B may offer 6 percent for a similar term deposit for the same period of six months.
Sharp depositors are often on the lookout for good deals like these and they will readily shift their deposits from one bank to a competing bank that offers them a higher yield. However, depositors must be careful also. Shaky banks often give a high rate for big amounts to cover some shortfall in their deposit portfolios and a depositor could conceivably end up with his monies tied up in case of a bank run in that shaky bank. Although deposits are insured, this coverage creates a moral hazard that has been the subject of debates for years.