Come the New Year, the government will permit financial institutions to offer "money market rates" to customers with as little as $1,000 to deposit.
But consumers shouldn't expect the reduction in the minimum deposit to generate anything near the hoopla that surrounded the introduction of money market accounts two years ago.
Then, in a desperate attempt to lure back depositors who had fled heavily regulated financial institutions for the high rates offered by money market mutual funds, banks engaged in an intense interest-rate war to attract customers with at least $2,500 to deposit in new money market accounts.
Bankers, on the whole, appear far less interested in attracting $1,000 depositors to money market accounts. Out of nine large area banks surveyed informally by The Washington Post, only three -- American Security, Equitable and First Virginia -- said they plan to offer "market" interest rates to customers willing to open a money market account with $1,000.
Riggs and Maryland National refused to disclose their plans, in an effort to keep the information from their competitors. National Bank of Washington said it will permit customers to open a money market account with a $1,000 balance but will not pay money market rates until the balance reaches $2,500.
Three banks -- Suburban, United Virginia and Sovran -- said they plan no changes in their money market accounts. That means $2,500 will be required to open the account, and if the balance should drop below $2,500, the banks will pay 5.25 percent, the same rate banks are permitted to pay on NOW accounts.
The lack of enthusiasm among bankers for the smaller balance accounts should not be a surprise, one bank official said. With a $1,000 balance, the money market account could be an expensive way for a bank to raise short-term money.
The accounts, which can be used as savings accounts or limited-purpose checking accounts, have reasonably high fixed costs that do not change whether the account has $1,000 on deposit or $20,000.
The government permits a customer to make up to six payments a month from the account, of which three can be checks. The other three would have to be preauthorized payments, such as insurance premiums, mortgages and utility bills. All six so-called third-party payments could be preauthorized. In addition, the customer can make cash withdrawals.
The bank also must provide a monthly statement to customers. The monthly fixed costs of maintaining a money market account are $5 to $7 -- less than the $7 to $8 it costs a bank to maintain the average checking account, according to William White, senior vice president of the National Bank of Washington.
When a money market account has $2,500, the $5-a-month fixed cost is equivalent to about 2.4 percent a year for the bank. At $1,000, it is equivalent to 6 percent.
Money market accounts now are yielding about 9 percent in interest; but because the rate is not fixed except when the balance drops below $2,500, some banks pay more and some pay less. As a result, an account with $1,000 in it might cost a bank the equivalent of 15 percent, while a $2,500 account would cost 11.5 percent. To raise money in the open market -- by selling large-sized certificates of deposit -- banks have to pay about 9 percent interest plus a tiny amount in fixed costs.
One bank financial officer said the stability of money market deposit accounts makes it worth a bank's while to incur higher costs to attract them.
But, he added, to pay the equivalent of 15 percent for money that can be had in the open market for a total cost of less than 9.5 percent makes little sense.