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Banks Might Pay Higher Interest Soon

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September 04, 2013 – Comments (1)

Board: Macro Economics

Author: WendyBG

To protect the banks after the 2008-9 financial crisis, the Federal Reserve provided billions of dollars in free money to banks by paying interest on bank reserves at the Fed.

Instead of paying interest on savings accounts and Certificates of Deposit, the banks parked their cash at the Fed. From the historical norm of about $20 billion in Total Reserves of Depository Institutions at the Fed, the amount is now $2.1 Trillion and still rising.

http://research.stlouisfed.org/fred2/series/TOTRESNS


The Fed also provided zero-cost money to the banks. The Federal Funds Rate, which was 5.25% in late 2007 (helping to pop the real estate bubble) was dropped to about 0.2% at the end of 2008 to the present.

http://research.stlouisfed.org/fred2/series/DFF

Since banks are able to borrow an unlimited amount from the Fed at close to zero interest, the banks dropped interest payments to ordinary savers to practically zero.

Prudent, conservative savers who do not want to take risks in the stock market have a terrible choice: keep their money in the bank and watch inflation erode the value, or take stock market risk.

http://www.cnbc.com/id/100999776?__source=yahoo|finance|head...


Billions exit bank accounts after years of inflows

CNBC: Friday, 30 Aug 2013 | 12:32 PM ET
By: Jeff Cox, Senior Writer

American bank accounts have gotten noticeably smaller this year as mom-and-pop investors have begun to embrace risk.

Deposit balances in insured banks have fallen by $51 billion—a small amount relatively speaking, to be sure, but notable in that it reverses a six-year pattern...

"Financial institutions will need to start increasing interest rates on deposits in order to maintain current deposits levels and to increase liquidity ratio as mandated by Basel III," he added, referring to the international guidelines for bank capital requirements....

The year has featured an overall change in where retail investors have moved money.

Bond mutual funds have seen dramatic outflows, with the biggest beneficiary nondomestic mutual funds—European equity funds have taken in $12 billion over just the last two months—and blended funds that offer exposure to stocks and bonds. ... [end quote]

Households have finally regained the level of total assets they had before the financial crisis. Households continued to add to savings deposits even as the stock market rose due to Federal Reserve and foreign central bank money pumping.

Households and Nonprofit Organizations; Total Assets: $83.7 Trillion
http://research.stlouisfed.org/fred2/series/TABSHNO

Households and Nonprofit Organizations; Corporate Equities; Asset, Level: $11.2 Trillion.
http://research.stlouisfed.org/fred2/series/CEABSHNO

Households and Nonprofit Organizations; Total Time and Savings Deposits: $7.1 Trillion
http://research.stlouisfed.org/fred2/series/TSDABSHNO

The pattern of past bubbles is clear. Speculators drive up the price of commodities (whether tulip bulbs, stocks, real estate, etc.) while conservative investors stay on the sidelines. As the market rises, the trend appears to be "safely" upward, drawing conservative investors in. This extra demand pushes prices into a characteristic exponentially-growing curve. A bubble is far different from rising prices that are supported by real earnings. The P/E ratio increases above the historical average.

http://www.smithers.co.uk/page.php?id=34

Conservative investors are just beginning to withdraw money from zero-interest bank accounts to buy stocks. If this is a trend change (not just noise), the banks may be forced to raise interest to attract depositors.

Basel 3 requires a certain level of deposits. The banks can't get all their money by borrowing from the Fed.

Will depositors continue to move their money out of banks? Will banks be forced to pay higher interest to attract them back?

Stay tuned. This is an important trend to watch because it affects millions of families that should not be risking their money in the stock market.

Wendy 

1 Comments – Post Your Own

#1) On September 04, 2013 at 8:07 PM, awallejr (82.72) wrote:

Well if you think them paying 1-2% as being high, then maybe, but they aren't going to be paying what you got in 2007 any time soon.

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