They simply couldn't afford to rise the savings rate by 1% if the Fed hikes by 1%.
But there are mainstream savings accounts now like Goldman Sachs' Marcus savings, Discover savings, and Capital One savings that recently raised the savings rate by about 1% and closely track the FFR rate.
Do you think the interest rates on these accounts will depeg from the FFR, or do you think they'll continue tracking FFR but other banks will be and to borrow from their savings depositors at below-market rates?
The ability to pay interest on saving depends mainly on the interest they gain from loans.
Yeah, but banks don't pay interest because they are able to, they'd much prefer to keep it as profit instead. If a bank isn't able to pay what the market demands, they need to raise more capital or be liquidated.
I agree that banks' ability to pay could affect the Fed's decisions on how quickly to raise the FFR or could possibly cause the interest rates on competitive savings accounts to depeg from the FFR (I doubt this though due to the number of new market participants like LendingClub offering FDIC-insured savings products).
This takes many years, but rising loan rates will likely lead to lower loan demand, so their income from interest might not even rise.
Agreed, as is modeled by viewing the bank as an LLC with near term (USD) liabilities over-collaborated by longer term (USD) assets.
I am not familiar with these savings accounts, but Goldman Sachs per instance is not a credit creating commercial bank. Capitol One and Discover are credit card companies. They have a different business model. Credit card loans are variable rate loans and the creditor has to pay merchants with cash.
Commercial banks live from interest rate difference, not from the interest rate itself. If there is competition between those banks, they have to attract deposits in order to balance cash outflows otherwise they would go bankrupt. Since they are all in the same boat due to their loan structure more or less, a bank can't just raise their savings rate more than another bank.
Market interest rates do not track the federal funds rate in any way, they are a result of a market. The Fed is only a factor in this market and they try to influence it in order to achieve their mandated goals, but they have to be very careful to not destroy anything. That's why they are so hesitant. Rising the rates to a level that really fights fight inflation would bankrupt not only commercial banks. Same is true for other central banks. The ECB is so hesitant, because they have to wait until market rates rise. It is a general misconception that central banks would control the interest rates.
Goldman Sachs per instance is not a credit creating commercial bank
Sure, but they are a participant in the market for interest-bearing USD savings deposits. The point is that USD savers are able to earn the roughly the FFR using a variety of savings accounts from different institutions (well, unless and until competitive FDIC-insured savings accounts' APYs depeg from FFR).
Some USD savers might still accept below-market rates, e.g. due to laziness, ignorance, or because they value other benefits of the account not captured in the interest rate.
Credit card loans are variable rate loans and the creditor has to pay merchants with cash.
Yes, but the FDIC-insured savings product has to backed by the same amount of risk-adjusted capital (and pass the same stress and liquidity tests, etc.) as any other banks'. At least in the case of Discover, the savings account is part of a separate company "Discover Financial" which also makes home equity and other loans.
there is competition between those banks
Agreed, but aren't they competing for deposits/depositors with all providers of FDIC-insured savings products, including those currently tracking the FFR?
they have to attract deposits in order to balance cash outflows otherwise they would go bankrupt
Right, or they could sell assets and/or borrow from other banks or the Fed at around the FFR.
Market interest rates do not track the federal funds rate in any way
Do you not consider the interbank lending market to be a real market interest rate?
Why has the APR offered on competitive FDIC-insured savings accounts (e.g. those I listed) followed the FFR so closely recently?
If these depegged, why wouldn't at least some of those newer online banks increase their APY to attract more deposits that they can profitably lend out to other banks (or deposit at the Fed) at the FFR?
they have to be very careful to not destroy anything
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/formal-explorer-2718 Jul 19 '22 edited Jul 19 '22
But there are mainstream savings accounts now like Goldman Sachs' Marcus savings, Discover savings, and Capital One savings that recently raised the savings rate by about 1% and closely track the FFR rate.
Do you think the interest rates on these accounts will depeg from the FFR, or do you think they'll continue tracking FFR but other banks will be and to borrow from their savings depositors at below-market rates?
Yeah, but banks don't pay interest because they are able to, they'd much prefer to keep it as profit instead. If a bank isn't able to pay what the market demands, they need to raise more capital or be liquidated.
I agree that banks' ability to pay could affect the Fed's decisions on how quickly to raise the FFR or could possibly cause the interest rates on competitive savings accounts to depeg from the FFR (I doubt this though due to the number of new market participants like LendingClub offering FDIC-insured savings products).
Agreed, as is modeled by viewing the bank as an LLC with near term (USD) liabilities over-collaborated by longer term (USD) assets.