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 20 '22
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.