By: Phil Kernen
With the advent of interest rate increases courtesy of the Federal Reserve, savers could also expect yields on their savings accounts to climb. Savings account yields have risen, but less than interest rates driven by the FOMC. The reasons suggest little chance of that changing soon.
Too much capital
Banks earn money by making loans, taking on deposits to turn and lend that money out. The goal is to achieve a positive net interest margin, making more money on the loans they issue than the cost to fund those loans. The less paid on deposits, the bigger the net interest margin and the greater the earnings.
Over the last two years, deposit growth has far exceeded loan demand growth. When the pandemic hit, a mix of easy monetary and financial policies put trillions of dollars into our collective pockets. Consumers and businesses found themselves with excess cash and little need to borrow. Banks found themselves with loads of lending capacity and comparatively little lending demand.
Today, banks are flush, sitting on deposits of nearly 18.0 trillion dollars compared to loan demand of just under $11.0 trillion. Banks have more than enough deposits and have no incentive to pay for more.
Expected recession
Strengthening inflation earlier this year pressured consumer and business cash reserves, inducing them to borrow and driving increasing loan growth. However, the speed and degree of interest rate increases caused by the Federal Reserve have everyone expecting a recession. While it hasn’t arrived yet, if an economic slowdown does occur, banks want to ensure they are within the capital requirements set by the Federal Reserve and are tightening their lending standards in response. Banks are also concerned about weakening demand in secondary trading markets, which means facing a higher risk of holding loans on their balance sheet longer than they might like.
Investor inertia
Some banks factor customer inertia into their rate decisions. We often fail to take advantage of better deals because setting up new accounts or switching banks is a hassle. If enough of us decided to act, bank behavior might change. So, take the time to review your alternatives.
How low are savings yields?
According to Bankrate, the range of savings yields is broad and more like a barbell than a ladder. Some of the biggest banks offer yields as if nothing has changed. TD Bank, Chase, U.S. Bank, Wells Fargo, and Bank of America all offer yields of 0.01%, unchanged from the past decade. Other banks with different lending patterns start at 2.35% and move as high as 3.0% on new accounts.
Fortunately, investors looking for safety have other alternatives – lending to the U.S. Treasury, which still needs money to fund current and future deficits. Yields on U.S. Treasury Bill maturing from three to twelve months range from 4.0 – 4.5%. Savers have suffered over the last decade of zero-interest policies. Don’t let low bank rates on savings accounts keep you from finally earning a return on your cash.
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