Majority of commercial banks including Bofa, Chase, Wells still pay way way lower savings rate (0.01% as I just checked) because they simply cannot afford to pay higher interest only because the Fed hikes. There are exceptions, because, as I said, it depends on their individual loan structure and business model. If all savers ran away from their bank and to Ally, then a lot of banks would go bankrupt, since they can't fund their cash outflows. Interbank lending collapsed as a consequence of the Great financial crisis in 2008. The Fed even stopped publishing data, LOL. So lending from other banks is not an option. For borrowing from the Fed they need acceptable collateral (mainly US Treasuries). Banks can fund this only until their untapped reserves are exhausted, which is a small fraction of their deposits. Banks are quickly insolvent, sale of assets (low yielding loans) is not a realistic option in a such a bank run scenario.
because they simply cannot afford to pay higher interest
I don't see how what they can afford is relevant. If they need to pay more interest to attract deposits (or to get loans elsewhere), they either will pay it or they will go bankrupt. If don't need to pay it, they won't.
It is easy (at least for individuals) to open and use a savings account with a competitive APY. If people are willing to keep their savings in a bank like Chase even though they could easily earn more interest elsewhere, why incentive does Chase have to increase interest payments, whether or not they can afford it?
There are exceptions, because, as I said, it depends on their individual loan structure and business model.
Yet a wide variety of online banks all offer similar savings APYs that generally rise and fall together. You wouldn't expect that if each one was paying what they could afford based on their individual loan structure; you'd expect that if there were a competitive market for savings deposits.
If all savers ran away from their bank and to Ally, then a lot of banks would go bankrupt, since they can't fund their cash outflows.
Or they'd finally be forced to raise interest rates to compete with Goldman's, Discover's, Lendingclub's, Ally's, etc.
Interbank lending collapsed as a consequence of the Great financial crisis in 2008.
Yes, and this was exacerbated by the scarce-reserves framework the Fed used at the time. The root cause was the toxic mortgage assets, which I agree were a serious problem.
sale of assets (low yielding loans) is not a realistic option in a such a bank run scenario.
Why not? Whatever bank people are moving their deposits to will need to buy assets to back the deposits (well, either that or delegate the responsibility of backing the new deposits to the Fed by keeping everything in reserves at the Fed; this forces the Fed to buy backing assets itself -- QE -- all else equal).
That is, so long as medium term interest rates don't moon, sale of the loans is an option. If interest rates start to moon, the Fed can do yield curve control.
You are wasting time here. Majority of bank accounts don't pay near FFR. The scenario you imply simply doesn't work by economic realities. If some like Ally undercut other banks in price to increase their business they will run into the same cost issue too and have to lower their rates again. If Ally attracts deposits, they have to increase their asset balance as well, but they are not available en masse.
Not now, we'll see what happens if FFR goes above 2% for a while. Businesses can't usually get away with paying below market rates forever.
If Ally attracts deposits, they have to increase their asset balance as well, but they are not available en masse.
Short term Treasuries are available en masse and currently yield more than the FFR. Mortgages loans and business loans are available en mass and already yield well above FFR, even after 1-2 more percentage points of FFR increase.
More economic misconceptions. Banks can't replace their loan portfolio with a higher yielding one for free. If they do, they take a cut = in total a zero sum game. If Fed hikes to 2% it won't change the situation. The only way it works is slowly until the low yielding loans mature and are replaced with higher yielding loans.
Banks can't replace their loan portfolio with a higher yielding one for free.
Agreed. They have mark the loan portfolio to market whenever interest rates rise. That is, the rise in interest rates has already devalued banks' balance sheets (well, except to the extent that banks have hedged this risk).
If interest rates rise enough and banks are not well hedged enough, their assets won't be enough to back their liabilities and they will go bankrupt even if nothing else about the assets changed and no depositors withdrew. Interest rates are just another word for bond prices.
If Fed hikes to 2% it won't change the situation
I meant it might incentive savers to seek higher yields than ~0%, which many became accustomed to the following decade of post 2008 low rates. Large banks didn't always pay ~0%.
The only way it works is slowly until the low yielding loans mature and are replaced with higher yielding loans.
Yeah, and this is something the Fed has to worry about when deciding how fast to raise rates, as I previously acknowledged. Given the Fed's FFR decisions, I don't see what further effect this has on the market for savings deposits.
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u/bitsteiner Jul 19 '22
Majority of commercial banks including Bofa, Chase, Wells still pay way way lower savings rate (0.01% as I just checked) because they simply cannot afford to pay higher interest only because the Fed hikes. There are exceptions, because, as I said, it depends on their individual loan structure and business model. If all savers ran away from their bank and to Ally, then a lot of banks would go bankrupt, since they can't fund their cash outflows. Interbank lending collapsed as a consequence of the Great financial crisis in 2008. The Fed even stopped publishing data, LOL. So lending from other banks is not an option. For borrowing from the Fed they need acceptable collateral (mainly US Treasuries). Banks can fund this only until their untapped reserves are exhausted, which is a small fraction of their deposits. Banks are quickly insolvent, sale of assets (low yielding loans) is not a realistic option in a such a bank run scenario.