bank rates

Banks Worried They’re Going To Have To Start Paying Savers For Their Money

Bankers fear the end is near.

Death isn’t imminent, but they sure are full of funereal gloominess.

And all because they realize once the Federal Reserve begins to raise short-term interest rates, they are going to have to – gasp – start paying savers a decent yield on their certificates of deposit and savings accounts.

A number of stories have popped up in the financial press recently warning the era of cheap cash is coming to an end.

With worry-wart headlines like “Bankers Fret About Risk of Higher Deposit Costs” and “Bankers Brace for Deposit Losses as Higher Rates Loom,” you’d think the banks fear going out of business.

No, they’re just worried about losing all that free money. Banks expect customers to flee from low- or no-interest accounts once deposit yields begin to rise.

They will “look for better returns on their cash holdings inside and outside the banking system,” according to American Banker.

And that means banks and credit unions are going to have to compete for your money.

From The Financial Times:

An outflow of deposits would be a reversal of a five-year trend that has seen significant amounts of extra cash poured into banks thanks to the Fed flooding the financial system with liquidity. These deposits, which act as a cheaper source of funding, have helped banks weather the aftermath of the financial crisis.

Now the worry is that such deposit funding may prove fleeting as the Fed retreats.

Banks might have to pay higher rates on deposits to retain customers – potentially hitting their profits and sparking a price war for client funds.

SNL Financial estimates that U.S. banks have collectively increased their deposits by 23 percent over the past four years, at the same time that their cost of deposit funding has dropped to a 10-year low. (emphasis added)

Here’s what that deposit increase looks like.

And here’s what 5-year CD rates look like.

It will be nice to see the line on the second graphic begin to head up again for the first time in years.

Still, banks today have so much cash on hand, they won’t have to make any fast moves after the Fed acts.

From American Banker: ” ‘Given the enormous amount of liquidity there is in the system … deposit rates (will) probably lag somewhat as overall rates go up,’ Aleem Gillani, the chief financial officer at SunTrust, said during a July 21 conference call.”

Great. Just what we need. More delay.

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Comments (1)
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One Existing Comment
  1. A.Bundy said:
    on September 4th at 02:23 am

    i’m surprised they still have customers after ruining the global economy. i moved my money into a credit union a long time ago. never seen a bank that even cared about its customers. i hope all banks dont pay anyone, that way they go out of business.