February 23, 2023 • 37 mins
The Federal Reserve has been raising benchmark borrowing rates at the fastest pace in decades, but the interest rate paid out to millions of people with bank accounts is still stuck at almost zero. According to data from Bankrate, the average interest rate on savings accounts is just 0.23%. So what's going on? Why have many banks so far avoided raising what they pay out to depositors even as the Fed hikes, and will that eventually change? What does it mean for the financial system and also economic policy given that higher rates are, in theory, supposed to encourage less spending and more saving in order to curb higher inflation? On this episode, we dig deep into the making of bank deposit rates with Barclays strategist Joe Abate.
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Speaker 1 (00:10):
Hello, and welcome to another episode of the All Thoughts Podcast.
I'm Tracy Alloway and I'm Joe. Wasn't all Joe? Do
you know what the average interest rate paid on US
bank accounts currently is? Holy? Because we just looked it
up and I couldn't blow it. I actually thought you
were wrong about as like I thought when you told
me the number that you must be a despel point off. Yeah,
(00:30):
it is surprising. So the average annual percentage yield er
ap Y according to bank rate is point two three percent.
And this at a time when, as you know, benchmark
interest rates are at like four and a half four
point seven five percent. I would have guessed that maybe
they were like one and a half. Two percent was
(00:53):
just still pretty low, right, So if you could get
four and a half percent as a bank an overnight rate,
and then it was like, okay, your saving your depositors,
check your account whatever, you get a couple percent that's
still spread, but they're still basically paying you nothing. I
just want to like hold your cash there, which is
pretty staggering. Absolutely, So this is a question that comes
up a lot, and it's obviously frustrating. If you are
(01:16):
a saver, you know, it's very everyone wants to be
a rentier to some extent, right, I'll want to make
money on our money exactly. That is the dream. So
if the banks aren't passing through those interest rate hikes,
it's naturally frustrating for retail depositors. However, it's also kind
of frustrating from an economic slash macroeconomic policy perspective, because
(01:39):
if you think about what monetary policy is supposed to do,
it is supposed to work through changes in interest rates,
which are supposed to ripple out from the central bank
into the rest of the economy. Right intuitively, like one
channel that you could imagine that rate hikes work through
is oh, look suddenly I'm getting a lot more money,
to say, or getting more Maybe I'll at the margin,
(02:02):
I'll save a little more because I'm getting paid to
spend a little less, create sort of decreased pressure in
the economy. I don't know if anyone ever really thinks
that way. It's like, oh, I'm not going to buy
like this watch, or I'm not going to buy these
like a concert tickets because I could get you know,
three percent having left this money in the bank. Nonetheless,
we have to get point two three percent. I'm definitely
(02:24):
gonna okay, I'm definitely going to keep spending in that case.
And of course there are ways to like get more
yield and you could lock it up, but if you
wanted to, you could go out, like buy a one
year CICA of deposits. Wo's not going to do that,
you know, You're not, Okay, it's so much to work. Okay, Well,
this is clearly something that we need to talk about,
both in the context of monetary policy and yes, broader economics.
(02:45):
And I am very pleased to say that we really
do have the perfect guest on this topic. We're going
to be speaking with Joe Abote. He is a money
market strategist over at Barclay's also does fixed income research.
I've been a fan of his work for a very
long time and happened meaning to get him on all
thoughts for just as long. So I'm very pleased to
have him here now to explain this discrepancy to us. Joe,
(03:08):
welcome to the show. Thank you. Nice to hear. Yes
and no. I think I think the fundamental problem with
bank deposit rates is that there's so many different types
of deposits, and because there's so many types of deposits,
(03:30):
it's hard to kind of come up with one comparable
interest rate across all banks and across all forms. Right,
So you have deposits a time, deposits for example, CDs
that you just mentioned, You've got checking account rates if
they pay interest at all, and then you've got you know,
different balance requirements for different types of customers and things
(03:52):
like that. So coming up with an explicit, one size
fits all bank deposit rate is difficult. But the phenomena
that you're describing where bank deposit rates in a rising
rate environment go up like a feather, and in a
interest rate cutting environment where the Fed is easing policy,
(04:14):
they sink like a stone. That's been a phenomena for decades. Well,
let's get into that then. So you know the FED
hikes rates on a Wednesday. Why doesn't that just automatically
translate to a bunch of banks emailing savers and saying
your deposit rate is going up? And I know there
are a couple that do seem to automatically raise saving rates,
(04:36):
but it's not the norm. Well, the question boils down
to kind of what does the bank need right in
terms of financing? Right, So most of its funding comes
from deposits, and banks have a fair amount of pricing
power when it comes to deposits, right, there's not many
(04:56):
substitutes for bank deposits out You might try a money
market fund, for example, or you might try, you know,
bills or like some of the things that you were
talking about, but you're not going to get the same
level of liquidity, for example, with deposit insurance that you
might with a bank deposit. And so if you're not
(05:20):
faced with a lot of competition, and I'm talking about
industry wide, then deposit rates don't necessarily have to go
up lockstep with the increase in the fent funds rate.
So to your point, you know, it's not terribly surprising
that deposit rates don't go up immediately when the FED
(05:41):
raises rates. Now, I will say that they do go up,
and the real issue is not so much the level
of rates, but the speed with which they go up, right,
And that becomes a question of what people call the
deposit data, which is how much of the monetary policy
(06:03):
rate or the change in the FED funds rate actually
gets passed on to depositors. And what happens is that
initially in the tightening cycle, banks are over deposited, and
as those deposits migrate into higher yielding products and they
lose financing, they start to compete more aggressively with each
(06:25):
other and they start to try to poach deposits from
one institution to the next. And what you see is
with subsequent rate heights, the deposit data right goes up.
And so what you normally find is that in the
last tightening cycle, for example, the pass through effect was
only about thirty five to forty of the rate heights
(06:47):
made it into bank deposit rates over the entire cycle.
But if you started at the cycle, it was down
around ten percent, and by the end of the cycle
it was closer to seventy five or eighty percent. And
that has happened, you know, pretty much every interest rate
cycle going back decades, which is start low and high,
(07:09):
but that the overall deposit beta for the cycle is
somewhere around thirty to forty of the Fed's rate ings.
And again, this is a competitive dynamic, right. There's not
a lot of substitutes for deposits out there, right that
offer the same level of deposit insurance or protection and liquidity.
(07:30):
Then you know, banks have a significant degree of pricing
power when it comes to deposits. So Joe, just on
that note, this idea that eventually deposit rates do go
up as the competitive process between banks kind of kicks in.
One piece of interesting research that I saw from the
New York Fed is this idea that deposit betas so
(07:50):
the relationship between you know, benchmark rates and what banks
are actually paying savers that they have been trending lower
in later interest rate cycles. So the beta now is
lower than it was in say like the early two
thousands hiking cycle. It's lower than it was and sort
(08:11):
of the most recent hiking cycle as well. What accounts
for that? You know, if I had to spect you that,
I'd say that there's probably two things that may account
for it. One is that Kewey has kind of changed
to the dynamics so that banks, you know, at the
beginning of a tightening cycle are significantly more over deposited
than they were in past tightening cycles. And that might
(08:32):
account for why deposit betas are lower, because banks have
a thicker cushion of deposits, and therefore they don't have
to compete as readily as they did or as quickly
as they did back in earlier tightening cycles. The second thing,
which I think doesn't get as much attention right is
the fact that I think banks increasingly, especially the larger
(08:54):
domestic institutions, are not competing specifically on explicit interests. And
I think what happens is that banks are able to
pay people, especially institutions, with services, and rather than compete
on interest rate, they compete on price services. So they
(09:17):
may offer discounts, you know, volume discounts, if you want
to think about it, and that that dynamic where you've
got competition occurring through you know, kind of a non
price mechanism, a non interest price mechanism, may alter how
datas perform a tightening cycles. So I think that's probably
(09:40):
I think those are probably the two main reasons why
deposit datas are not as high as they were in
previous cycles. So could factors like the quality of an
online app, the size of the network, the ease of
the website, the interconnectedness of a big banks website with
(10:02):
payment apps like zell and other things like that, Like
could Lease essentially be selling points where just bank X.
I won't name any specific banks because I don't know
the details. Bank excess look we have this great app,
we have this great integration with all these things. Are
you really going to move your you know, eight thousand
dollars checking account over to why for one extra bank?
(10:25):
Why for one extra percent? It's going to be like,
you know, fifteen dollars extra a year and all the
has to details. Yes, I think that. I think that's
exactly right. I would also say that there's a time
tax involved too, right, which is kind of the corollary
of this, which is that your paycheck is linked directly
to your checking account and you know, migrating it to
(10:50):
a different bank requires you know, kind of contacting HR
or probably filling out online forms at your office to
kind of change the direction. And that's a hassle. And
I think the hassle effect is probably what keeps deposits sticky,
as well as the service effect that you mentioned, right,
(11:12):
the non non price services. I would suspect that the
effect is actually bigger for institutional deposits than it is
for retail depositors. Right, that institutions obviously face much bigger
costs switching banks. In addition to other non price services,
(11:33):
which might include investment banking advice or things along that nature.
That make deposits a little bit more sticky at the
institutional level as well as it's a retail level, so
it's not just retail but also institutions. Right, if you're
a treasurer for a large company, I can imagine that
there's a whole process to changing your preferred bank. Right.
(11:56):
You know, Tracy and our producer Dash, I'm not going
to say which one, but they're both customers of a
certain large banks fintech arm and they're also talking about
always talking about like the juicy interest rates they're getting
on their checking accounts. But it does seem like kind
of a hosshold. So yes, it is more money, but
I don't really want to deal with it. What you know,
(12:16):
when we talk about competition, what about sort of like
classical ideas about market structure in terms of the number
of banks, the size of the banks, the rise of
like a handful of these mega national banks, and does
that play and you roll in the sort of decline
and deposit betas over time. You know, I'm not an
(12:38):
industry analyst at that level. You know, we do have
a lot of banks in the US, and there is
definitely a convenience factor to location. So hard to know
how that plays out, at least in my mind in
(13:00):
terms of deposit concentration. But deposits are definitely concentrated in
the US at the largest banks. I will say that
now again, is that because of the stickiness of those banks,
or the convenience or their online services or their network effects.
I suspect it's a variety of everything. So one thing
(13:32):
I wanted to ask is, you know, the way sort
of retail deposits are supposed to work is you give
the bank money, they pay you some interest, and the
interest is coming from I guess the array of central
bank facilities nowadays, but also from the bank taking your
money and lending it out into the wider economy. So
(13:53):
to what degree our bank deposit rates also a function
of the lending or investment opportunities that banks see in
the market. The primary driver is going to be asset
growth on the bank side, right, That determines how competitive
banks have to be in deposits. And so if you
think about the bank's balance sheet on the asset side,
(14:14):
it's got essentially three types of assets. It's got loans,
it's got cash that it has to maintain for regulatory purposes.
At the few reserve and it's got securities holdings. Right
on the liability side, most of its funding comes in
the form of deposits of some kind, and there's an
advantage to deposits, especially retail deposits, because as you said,
(14:35):
they are pretty sticky, right, and the stickiness is partly
a function of the services, but it's also a function
of government guaranteed deposit insurance as well. In addition to that,
there's wholesale funding that they can rely on. Now, whether
that's commercial paper or turned financing, corporate debt, etc. These
(14:56):
are all supplemental forms of funding that they can rely
on to camp up their funding as asset growth, you know,
as assets growth, and so from banks perspective, it's got
to figure out and it's got to balance on the
asset side the interest returns on its earning versus interest
(15:18):
costs of raising more deposits are raising more wholesale funding,
and that balancing act is really blue way Monetary policy
is expected to unfold, right, Monetary policy is expected to
kind of influence that dynamic. The asset side of the
balance sheet determines how you decide to fund it, whether
(15:39):
you're using deposits, which are probably the cheapest, stickiest form
of funding, or whether you're using wholesale funding right, which
is a little bit more expensive, more flight prone, but
you know, depending on your size, may be easier to
raise because you have more market access than say a
smaller institution. So it becomes kind of a question of
(16:03):
at least monetary policy becomes a question of how to
banks triage between their asset growth deposit the loans securities
in cash versus their liability side deposits and wholesale funding
for its commercial paper, corporate bonds, other you know, kind
of term financing that's available out there, and that kind
(16:23):
of balancing is the way monetary policy is supposed to
affect bank lending decisions and the transmission of the Fed's
interest rate changes. Can you talk a little bit more
about how retail deposits as a source of funding, their
role in twenty twenty three or twenty twenty two or
(16:44):
whatever versus the past, What is the like how would
you know if we're having this conversation in the nineties
or early two thousands, what is the role of retail
deposits as a source of funding then versus today? Has
it changed? Yeah? So what I would say is that
retail deposits have actually become more important over time because
(17:06):
of regulatory changes. So if you're called back before the
financial crisis, one of the things that was happening was
that banks were increasingly reliant on wholesale funding. And they
went to wholesale funding because it was cheap and it
was readily available. But the result of that wholesale funding
reliance was that a lot of their funding became very
(17:29):
very rate sensitive and very rate or rather very flight prone.
And you can imagine an extreme situation where you're financing
let's say, thirty year mortgages and you're financing them on
an overnight basis in the repo market, you have a
significant maturity mismatch, right where if that repo funding can't
(17:51):
be rolled, you lose your source of financing for those mortgages.
And so one of the consequences of the financial crisis
when we aw that funding was as light prone as
it was, particularly in these markets, regulators kind of emphasize
the need for banks to a hold more liquidity, whether
it's told higher cash balances at the FED right and
(18:14):
simultaneously rely more heavily on wholesale funding on retail funding,
that is deposit based funding. And so we've seen over
the last really twenty years or so as a decline
in the ratio of repo funding CP market funding, you know,
kind of these financial instruments of short maturities and we're
(18:35):
financing asset growth, you know, before two thousand and six,
and those have been replaced by more deposit funding now.
As I said earlier, initially that would be reflected in
higher deposit rates. Of course, que at the time at
suppress deposit rates. And if you recall that before twenty
and twelve, right, we had unlimited deposit insurance on transaction
(18:59):
fought accounts for a while, right, in order to kind
of keep funding stable for banks. What's happened since then, right,
as as interest rates go up, as I said earlier,
banks have been able to compete on non price or
non interest rate services more and the deposits have kind
of remained sticky. So you have this kind of wholesale
shift away from kind of wholesale funding to retail deposits.
(19:24):
And if you want to go back even further, this
looks more akin to an environment that kind of existed,
you know, prior to the nineteen eighties, right, to an
environment where banks were much more deposit reliant and much
less relying on financial products. And if you look back,
you know further, this is kind of really beckons to
(19:47):
an era of you know, kind of pre interest rate
decontrol for nineteen eighty. But again that's that's going back
a lot of many, many many years now, right, So,
depot sets are more important as a source of bank
funding thanks to the experience of the financial crisis and
post GFC regulation, and at the same time, because we've
(20:11):
had things like que a lot of banks are simply
swimming in deposits to the extent that they kind of
have more than they perhaps need, which means that they
are willing to allow depositors to maybe look elsewhere for
better rates. They are However, some banks are losing deposits
(20:35):
faster than other banks. Yes, I wanted you to bring
this up. This is the small bank versus large bank
deposit experience. And also this dovetails with a previous episode
on discount lending, the discount window. I'm sorry I missed
that discount window lending piece, but I think you're exactly
(20:56):
right here, which is that the level of deposits and
the level of bank reserves in the system. That is,
the cash and the liquidity circulating in the system is important,
but so too is the distribution of those balances across institutions.
And what we're seeing is that unlike QT or quantitative
(21:18):
tightening in twenty seventeen, the deposits are leaving right, or
at least the cash is leaving small banks faster than
it's leaving the large banks, and so that the smaller
banks are forced to compete more aggressively in deposit markets
than say they're larger banks. Now, part of this is
(21:41):
a reflection of the fact that when QT occurred, right,
deposit balance is migrated to the largest institutions out there,
again because deposits are heavily concentrated, and so those banks
tended to be more over deposited relatively speaking than the
smaller institutions. That when the FED is braining reserves and
(22:02):
shrinking its balance sheet, the people that have less liquidity
to start off with because they had less fewer deposits,
those are the institutions that are experiencing more deposit rate pressure.
How do the small banks even compete? I mean, I
guess rods as you say, but like, is this like
going to be a permanent condition of banking. This struggle
(22:24):
that the small banks have for deposits relative to these high,
high networked large national banks. Again, you know, small banks
would argue that there are you know, advantages to banking locally,
and that the advantages to banking locally is, you know,
(22:46):
your mortgage lender knows the market right, knows the housing
market in your area, your commercial banker knows your business,
knows your knows you personally, etc. And so there's you know,
So I wouldn't say that it's inevitable that all deposits
(23:06):
will migrate to large institutions, and large institutions will be
selective and paying deposit rates. I still think that there's
enough competition between large and small banks right that you know,
small banks are not going away at all. But again,
this deposit competition that we're experiencing right now is the
(23:28):
aftershock of quantitative easing, right. Quantitative easing and the buying
of treasury securities and mortgages again ended up putting a
lot of deposits into the system as a whole. But
those deposits tended to pile up faster at the larger
institutions than the smaller institutions. So just on that note,
and you already touched on this, but can you dig
(23:49):
in a little bit more into what QT or quantitative
tightening actually means for I guess the effectiveness of monetary
policy is it does it like mechanically ramp up that
competition for depositors, or does it maybe encourage some sort
of substitution effect where you know, banks can I don't know,
(24:12):
replace bank deposits with great sensitive treasuries or something like that.
That's again an important distinction, and I think what you
have to look at here is the demand curve or
bank reserves, right. This is the liquidity that's in the system,
created from quee right from the asset side of the
(24:32):
fed's balance sheet, and these reserves are used to me
int day requirements for settling payments as well as liquidity
requirements for regulatory purposes that banks are required to maintain.
And as the FED lets the assets on its balance
sheet roll off right and doesn't replace them, so that
(24:55):
it's balance sheet shrinks, bank reserves go down, right, and
the decline in bank reserves is what forces banks right
ultimately to compete more aggressively in deposit markets because they
need to restore that cash position on their balance sheet.
In addition to the fact that their assets growing, right,
(25:15):
they're making loans, they need to replace that funding. The
extent to which QT creates reserve pressure, right, is what
creates the pressure on the FED funds rate. Right, the
Fed's policy instrument and determines ultimately where the FED funds
rate trades within its target band. Right. So what the
(25:38):
FED wants to do is, if you think about the
demand curve, demand curve is probably for bank reserves is
probably I'm going to get this wrong concave shape, right,
so it kind of caves in in the middle, and
when you get to the upper part of the demand curve, right,
you're in the steep slope. The steep slope of that
(26:01):
demand curve means is that changes in the level of
bank reserves creates significant changes in interest rates. And the goal,
right from the Fed's perspective, is merely to shift the
supply of bank reserves so that it's in the gently
sloping part of the demand curve. Right, that the level
(26:21):
of bank reserves is ample, right, but not abundant. An
ample means that it's not scarce, right, so that the
level of the Fed funds are a relative to other
market rates or within the band. Right, it's comfortably in
the middle. Right. Remember, the Fed is is targeting a
twenty five bases point band between the top and the
bottom of the Fed funds rate, and the goal is
(26:44):
to kind of keep the Fed funds rate, you know,
within the midpoint, let's say, of that band, right or
close to that midpoint. So again, you want to stay
away from the steep part of the demand curve. But
it's the same respect right, unless you're you know, substantial
easing policy and you've pushed rates to zero. You also
(27:04):
want to stay away from the super platform of the
demander right where you've got bank reserves and access. At
four trillion dollars, interest rates are totally unresponsive to the
level of liquidity in the system because you've effectively driven
rates to zero. Right. So again that's that's kind of
a long winded way of describing what the goal of
QT is, Right, create enough pressure on interest rates but
(27:27):
not too much. How do you have an estimate for
how small the fit is going to shrink its balanchid ultimately? So, uh,
(27:48):
this is pretty complicated, and I think you have to
be pretty humble, we should ask what the level of
ample excess reserves is too, just to get all the
all the loaded questions out there, all right, So my
sense is that the level of ample reserves is probably
around two point seven trillion dollars. But I'm a little
(28:12):
bit cautious about that because I think the level of
reserves is less important than the ratio of reserve balances
is to the total cash total assets that banks have.
So that if you look at twenty nineteen, when we
saw all that bank reserves got too thin, we saw
(28:34):
that going back to our demand curve, right, the ratio
of bank cash assets to total assets strength below eight percent.
So the eight percent mark is kind of the threshold
that divides ample from scares, and so my senses, you
want to keep bank reserves in terms of ample around
(28:56):
eight percent or higher. Right at the moment, they're around
nine percent. If you break that number down between domestic
banks and small banks, right, you see a very different picture. Right,
domestic banks, that ratio is around ten and a half percent,
and they're probably still two percentage points or more away
(29:18):
from that twenty nineteen level where they were scarce. If
you look at small banks, they're around six percent sense,
and that's much closer to where they were in twenty nineteen.
So as we were talking about before, you know ample, right,
in an aggregate sense, you would definitely say that bank
(29:39):
reserves are ample, But in a relative sense, in terms
of the distribution between large and small banks, it's not
clear that there's as much ampleness of bank reserves than
the numbers suggest. I just have one more question, which is,
you know, in the interests of I guess, both financial
(30:00):
stability and the effective transmission of monetary policy and fighting inflation,
should we all be going out and finding the best
deposit deals for ourselves. Should we all be moving our
money around? Is this helpful? Yeah? I mean everybody wants
to earn more money, so I would expect that people
(30:22):
would migrate their balances to hire yielding products. And the
closest substitute for bank deposit at this point is a
money market fund. And the curious thing is that money
market funds are not experiencing inflows, right, So money market
fund balances are paying about four percent or more in
(30:44):
terms of seven day yields, right, So you can definitely
earn more than the twenty three basis points you mentioned
right in a government only money market fund. And what's puzzling,
at least to me, is that, given that difference between
what you can earn a money market fund and a
bank deposit, right, why aren't money fund balances going up? Right?
(31:07):
Why aren't they significantly higher than they are right now?
And I suspect right that there are two reasons for this, right.
One is that on the retail side, we are seeing
some level of interest rate sensitivity, but people are moving
into higher yielding products than government only money market funds.
(31:27):
And in fact, what they're doing is they're moving into
prime money market funds. And the prime money market funds
won't go into this sort of the details, but they
buy commercial paper and other credit instruments right, all short maturity,
but they earn a little bit more than a government
only money market fund. And so if you're an interest
(31:47):
rate since it's investor right, and you're looking for higher yields,
you're going to migrate into the prime funds. And what
we've seen is prime fund balances have gone up sharply
in the last at least since lift off. When you
look at institutional investors, I think what institutional investors are
doing is they're buying bills, right, They're looking at bill
yields and saying bill yields are significantly higher than what
(32:10):
I can get on a money market fund, right, And
so I'm going to buy bills rather than invest in
money market fund because I can earn higher yews. What
I do not think is true is that I do
not believe that multiple years of quantitative easing have somehow
suppressed interest rate sensitivity among investors so that they no
(32:32):
longer care about four percent yields in money market funds
and it will be happy to earn twenty three basis
points in a bank deposit and not move I suspect.
And we are seeing this as money is coming out
of deposits, but it's migrating into higher yielding stuff and
not necessarily governmental in money market funds at least for now. Okay, Joe,
(32:55):
that was a fantastic explanation of how this all works.
Thank you so much for coming on all lots. You
fulfilled a long held dream of mine to get you
on the show. So thank you so much. All right,
thank you. By now, so, Joe, I thought that was
(33:21):
not just an interesting walk through the question at hand,
which is why aren't banks raising deposit rates? But also
kind of a really nice overview of how the monetary
policy interaction with the financial system has actually changed since
the two thousand and eight financial crisis. No, I mean
I was like really interesting, like that sort of headline question,
why why don't they raise rates? But also like I
(33:43):
was just sort of curious, like how do banks work?
You know, like what is seriously like what is the
role of deposits? No, now you're like, why isn't more
money flowing into government money market funds? Well? Yeah, I
mean seriously, but I mean all these things like over time,
like the policy changes that were made, you know, post grant,
post grade financial crisis that sort of put this premium
(34:05):
on deposits. You know, there's this stat that I have
seen and heard that like you're more likely to get
divorced than to ever change banks in your life. Yeah,
and so what I've heard, and I don't know if
it's true. Other you know who knows is our frequent
guest Patrick McKenzie has written about this. But why do
banks still have these physical Yeah? Because if they could
(34:25):
just I've heard that if they could just get like
a few people in the door you're worth so much
money over the course of the lifetime as a customer,
even though no one goes into those retail things. And
it's partly because no one never really switched at banks.
I think it is like a phenomenally sticky business model.
And I remember when I went to university in London.
I remember banks pitching these student programs, and if I
(34:48):
was still in London, I think I would still be
with the bank that like recruited me when I was
a college student. It's weird because I think, like intuitively,
you'd think with the Internet that look that moving money
from one of to another would be more liquid, yeah,
more easy, But somehow it seems like the opposite, because
you have all these apps and you have passwords, and
you have bills connected to your account, and so I
(35:10):
feel like I'm going to change your banks, Like that's
so many things to switch, it's just not worth it.
The network effect, Yeah, the same thing that dollar dominance
and Twitter dominance and Facebook dominance. Even though it's all
it's it's network effects all the way down. So the
two other things I thought were really interesting, just very quickly,
are that idea of reserve scarcity, and this is something
(35:30):
that came up with Bill Nelson when we were talking
about why have we seen this tick up in discount
lending to the banks. This idea that even though we
still have a lot of reserves and liquidity in the system,
they are not evenly distributed. Yeah. And then secondly this
idea that as quantitative tightening really kicks into gear, you
might start to get this process where deposit rates start
(35:54):
going higher and there is that substitution effect. Yeah, and
the fact that like you can't actually or you're the
you're only gonna go get so far taking a crude
measure of cash to total assets. Because of this very
difference and model between the big domestic banks and the
small banks and how they make the smaller banks might
(36:14):
run into liquidity scarcity a lot faster than the larger banks.
So you know, can see why analysts like Joe are
in demand because it's not as simple as just sort
of like looking at one number and dividing by another number. Totally,
banking is not a monolith. Also, everyone should go deposit
rate shopping in order to aimate more money and improve
(36:37):
the monetary policy mechanism worse inflation. Will all be getting
more income and more income, the last thing that we
all need right now. If I had, if I was
a fintech, you guys are, and I'd be spending that money. Okay,
we're back to the circular nature of like prices going
down and then increasing prices, and then we never get
out of it. Shall we leave it there? Let's leave
it there. This has been another episode of the All
(36:59):
Thoughts Past. I'm Tracy Alloway. You can follow me on
Twitter at Tracy Alloway and I'm Joe Why isn't thall?
You could follow me on Twitter at the Stalwart, follow
our producers Kerman Rodriguez at Kerman Ermine and Dash Bennett
at dashbot, and check out all of our podcasts here
at Bloomberg into the handle at podcasts, and for more
Odd Lots content, go to Bloomberg dot com slash odd Lots,
(37:21):
where we blog, we post transcripts. We have a weekly
newsletter comes out every Friday. Go there and sign up.
Thanks for listening.
Hello, and welcome to another episode of the All Thoughts Podcast.
I'm Tracy Alloway and I'm Joe. Wasn't all Joe? Do
you know what the average interest rate paid on US
bank accounts currently is? Holy? Because we just looked it
up and I couldn't blow it. I actually thought you
were wrong about as like I thought when you told
me the number that you must be a despel point off. Yeah,
(00:30):
it is surprising. So the average annual percentage yield er
ap Y according to bank rate is point two three percent.
And this at a time when, as you know, benchmark
interest rates are at like four and a half four
point seven five percent. I would have guessed that maybe
they were like one and a half. Two percent was
(00:53):
just still pretty low, right, So if you could get
four and a half percent as a bank an overnight rate,
and then it was like, okay, your saving your depositors,
check your account whatever, you get a couple percent that's
still spread, but they're still basically paying you nothing. I
just want to like hold your cash there, which is
pretty staggering. Absolutely, So this is a question that comes
up a lot, and it's obviously frustrating. If you are
(01:16):
a saver, you know, it's very everyone wants to be
a rentier to some extent, right, I'll want to make
money on our money exactly. That is the dream. So
if the banks aren't passing through those interest rate hikes,
it's naturally frustrating for retail depositors. However, it's also kind
of frustrating from an economic slash macroeconomic policy perspective, because
(01:39):
if you think about what monetary policy is supposed to do,
it is supposed to work through changes in interest rates,
which are supposed to ripple out from the central bank
into the rest of the economy. Right intuitively, like one
channel that you could imagine that rate hikes work through
is oh, look suddenly I'm getting a lot more money,
to say, or getting more Maybe I'll at the margin,
(02:02):
I'll save a little more because I'm getting paid to
spend a little less, create sort of decreased pressure in
the economy. I don't know if anyone ever really thinks
that way. It's like, oh, I'm not going to buy
like this watch, or I'm not going to buy these
like a concert tickets because I could get you know,
three percent having left this money in the bank. Nonetheless,
we have to get point two three percent. I'm definitely
(02:24):
gonna okay, I'm definitely going to keep spending in that case.
And of course there are ways to like get more
yield and you could lock it up, but if you
wanted to, you could go out, like buy a one
year CICA of deposits. Wo's not going to do that,
you know, You're not, Okay, it's so much to work. Okay, Well,
this is clearly something that we need to talk about,
both in the context of monetary policy and yes, broader economics.
(02:45):
And I am very pleased to say that we really
do have the perfect guest on this topic. We're going
to be speaking with Joe Abote. He is a money
market strategist over at Barclay's also does fixed income research.
I've been a fan of his work for a very
long time and happened meaning to get him on all
thoughts for just as long. So I'm very pleased to
have him here now to explain this discrepancy to us. Joe,
(03:08):
welcome to the show. Thank you. Nice to hear. Yes
and no. I think I think the fundamental problem with
bank deposit rates is that there's so many different types
of deposits, and because there's so many types of deposits,
(03:30):
it's hard to kind of come up with one comparable
interest rate across all banks and across all forms. Right,
So you have deposits a time, deposits for example, CDs
that you just mentioned, You've got checking account rates if
they pay interest at all, and then you've got you know,
different balance requirements for different types of customers and things
(03:52):
like that. So coming up with an explicit, one size
fits all bank deposit rate is difficult. But the phenomena
that you're describing where bank deposit rates in a rising
rate environment go up like a feather, and in a
interest rate cutting environment where the Fed is easing policy,
(04:14):
they sink like a stone. That's been a phenomena for decades. Well,
let's get into that then. So you know the FED
hikes rates on a Wednesday. Why doesn't that just automatically
translate to a bunch of banks emailing savers and saying
your deposit rate is going up? And I know there
are a couple that do seem to automatically raise saving rates,
(04:36):
but it's not the norm. Well, the question boils down
to kind of what does the bank need right in
terms of financing? Right, So most of its funding comes
from deposits, and banks have a fair amount of pricing
power when it comes to deposits, right, there's not many
(04:56):
substitutes for bank deposits out You might try a money
market fund, for example, or you might try, you know,
bills or like some of the things that you were
talking about, but you're not going to get the same
level of liquidity, for example, with deposit insurance that you
might with a bank deposit. And so if you're not
(05:20):
faced with a lot of competition, and I'm talking about
industry wide, then deposit rates don't necessarily have to go
up lockstep with the increase in the fent funds rate.
So to your point, you know, it's not terribly surprising
that deposit rates don't go up immediately when the FED
(05:41):
raises rates. Now, I will say that they do go up,
and the real issue is not so much the level
of rates, but the speed with which they go up, right,
And that becomes a question of what people call the
deposit data, which is how much of the monetary policy
(06:03):
rate or the change in the FED funds rate actually
gets passed on to depositors. And what happens is that
initially in the tightening cycle, banks are over deposited, and
as those deposits migrate into higher yielding products and they
lose financing, they start to compete more aggressively with each
(06:25):
other and they start to try to poach deposits from
one institution to the next. And what you see is
with subsequent rate heights, the deposit data right goes up.
And so what you normally find is that in the
last tightening cycle, for example, the pass through effect was
only about thirty five to forty of the rate heights
(06:47):
made it into bank deposit rates over the entire cycle.
But if you started at the cycle, it was down
around ten percent, and by the end of the cycle
it was closer to seventy five or eighty percent. And
that has happened, you know, pretty much every interest rate
cycle going back decades, which is start low and high,
(07:09):
but that the overall deposit beta for the cycle is
somewhere around thirty to forty of the Fed's rate ings.
And again, this is a competitive dynamic, right. There's not
a lot of substitutes for deposits out there, right that
offer the same level of deposit insurance or protection and liquidity.
(07:30):
Then you know, banks have a significant degree of pricing
power when it comes to deposits. So Joe, just on
that note, this idea that eventually deposit rates do go
up as the competitive process between banks kind of kicks in.
One piece of interesting research that I saw from the
New York Fed is this idea that deposit betas so
(07:50):
the relationship between you know, benchmark rates and what banks
are actually paying savers that they have been trending lower
in later interest rate cycles. So the beta now is
lower than it was in say like the early two
thousands hiking cycle. It's lower than it was and sort
(08:11):
of the most recent hiking cycle as well. What accounts
for that? You know, if I had to spect you that,
I'd say that there's probably two things that may account
for it. One is that Kewey has kind of changed
to the dynamics so that banks, you know, at the
beginning of a tightening cycle are significantly more over deposited
than they were in past tightening cycles. And that might
(08:32):
account for why deposit betas are lower, because banks have
a thicker cushion of deposits, and therefore they don't have
to compete as readily as they did or as quickly
as they did back in earlier tightening cycles. The second thing,
which I think doesn't get as much attention right is
the fact that I think banks increasingly, especially the larger
(08:54):
domestic institutions, are not competing specifically on explicit interests. And
I think what happens is that banks are able to
pay people, especially institutions, with services, and rather than compete
on interest rate, they compete on price services. So they
(09:17):
may offer discounts, you know, volume discounts, if you want
to think about it, and that that dynamic where you've
got competition occurring through you know, kind of a non
price mechanism, a non interest price mechanism, may alter how
datas perform a tightening cycles. So I think that's probably
(09:40):
I think those are probably the two main reasons why
deposit datas are not as high as they were in
previous cycles. So could factors like the quality of an
online app, the size of the network, the ease of
the website, the interconnectedness of a big banks website with
(10:02):
payment apps like zell and other things like that, Like
could Lease essentially be selling points where just bank X.
I won't name any specific banks because I don't know
the details. Bank excess look we have this great app,
we have this great integration with all these things. Are
you really going to move your you know, eight thousand
dollars checking account over to why for one extra bank?
(10:25):
Why for one extra percent? It's going to be like,
you know, fifteen dollars extra a year and all the
has to details. Yes, I think that. I think that's
exactly right. I would also say that there's a time
tax involved too, right, which is kind of the corollary
of this, which is that your paycheck is linked directly
to your checking account and you know, migrating it to
(10:50):
a different bank requires you know, kind of contacting HR
or probably filling out online forms at your office to
kind of change the direction. And that's a hassle. And
I think the hassle effect is probably what keeps deposits sticky,
as well as the service effect that you mentioned, right,
(11:12):
the non non price services. I would suspect that the
effect is actually bigger for institutional deposits than it is
for retail depositors. Right, that institutions obviously face much bigger
costs switching banks. In addition to other non price services,
(11:33):
which might include investment banking advice or things along that nature.
That make deposits a little bit more sticky at the
institutional level as well as it's a retail level, so
it's not just retail but also institutions. Right, if you're
a treasurer for a large company, I can imagine that
there's a whole process to changing your preferred bank. Right.
(11:56):
You know, Tracy and our producer Dash, I'm not going
to say which one, but they're both customers of a
certain large banks fintech arm and they're also talking about
always talking about like the juicy interest rates they're getting
on their checking accounts. But it does seem like kind
of a hosshold. So yes, it is more money, but
I don't really want to deal with it. What you know,
(12:16):
when we talk about competition, what about sort of like
classical ideas about market structure in terms of the number
of banks, the size of the banks, the rise of
like a handful of these mega national banks, and does
that play and you roll in the sort of decline
and deposit betas over time. You know, I'm not an
(12:38):
industry analyst at that level. You know, we do have
a lot of banks in the US, and there is
definitely a convenience factor to location. So hard to know
how that plays out, at least in my mind in
(13:00):
terms of deposit concentration. But deposits are definitely concentrated in
the US at the largest banks. I will say that
now again, is that because of the stickiness of those banks,
or the convenience or their online services or their network effects.
I suspect it's a variety of everything. So one thing
(13:32):
I wanted to ask is, you know, the way sort
of retail deposits are supposed to work is you give
the bank money, they pay you some interest, and the
interest is coming from I guess the array of central
bank facilities nowadays, but also from the bank taking your
money and lending it out into the wider economy. So
(13:53):
to what degree our bank deposit rates also a function
of the lending or investment opportunities that banks see in
the market. The primary driver is going to be asset
growth on the bank side, right, That determines how competitive
banks have to be in deposits. And so if you
think about the bank's balance sheet on the asset side,
(14:14):
it's got essentially three types of assets. It's got loans,
it's got cash that it has to maintain for regulatory purposes.
At the few reserve and it's got securities holdings. Right
on the liability side, most of its funding comes in
the form of deposits of some kind, and there's an
advantage to deposits, especially retail deposits, because as you said,
(14:35):
they are pretty sticky, right, and the stickiness is partly
a function of the services, but it's also a function
of government guaranteed deposit insurance as well. In addition to that,
there's wholesale funding that they can rely on. Now, whether
that's commercial paper or turned financing, corporate debt, etc. These
(14:56):
are all supplemental forms of funding that they can rely
on to camp up their funding as asset growth, you know,
as assets growth, and so from banks perspective, it's got
to figure out and it's got to balance on the
asset side the interest returns on its earning versus interest
(15:18):
costs of raising more deposits are raising more wholesale funding,
and that balancing act is really blue way Monetary policy
is expected to unfold, right, Monetary policy is expected to
kind of influence that dynamic. The asset side of the
balance sheet determines how you decide to fund it, whether
(15:39):
you're using deposits, which are probably the cheapest, stickiest form
of funding, or whether you're using wholesale funding right, which
is a little bit more expensive, more flight prone, but
you know, depending on your size, may be easier to
raise because you have more market access than say a
smaller institution. So it becomes kind of a question of
(16:03):
at least monetary policy becomes a question of how to
banks triage between their asset growth deposit the loans securities
in cash versus their liability side deposits and wholesale funding
for its commercial paper, corporate bonds, other you know, kind
of term financing that's available out there, and that kind
(16:23):
of balancing is the way monetary policy is supposed to
affect bank lending decisions and the transmission of the Fed's
interest rate changes. Can you talk a little bit more
about how retail deposits as a source of funding, their
role in twenty twenty three or twenty twenty two or
(16:44):
whatever versus the past, What is the like how would
you know if we're having this conversation in the nineties
or early two thousands, what is the role of retail
deposits as a source of funding then versus today? Has
it changed? Yeah? So what I would say is that
retail deposits have actually become more important over time because
(17:06):
of regulatory changes. So if you're called back before the
financial crisis, one of the things that was happening was
that banks were increasingly reliant on wholesale funding. And they
went to wholesale funding because it was cheap and it
was readily available. But the result of that wholesale funding
reliance was that a lot of their funding became very
(17:29):
very rate sensitive and very rate or rather very flight prone.
And you can imagine an extreme situation where you're financing
let's say, thirty year mortgages and you're financing them on
an overnight basis in the repo market, you have a
significant maturity mismatch, right where if that repo funding can't
(17:51):
be rolled, you lose your source of financing for those mortgages.
And so one of the consequences of the financial crisis
when we aw that funding was as light prone as
it was, particularly in these markets, regulators kind of emphasize
the need for banks to a hold more liquidity, whether
it's told higher cash balances at the FED right and
(18:14):
simultaneously rely more heavily on wholesale funding on retail funding,
that is deposit based funding. And so we've seen over
the last really twenty years or so as a decline
in the ratio of repo funding CP market funding, you know,
kind of these financial instruments of short maturities and we're
(18:35):
financing asset growth, you know, before two thousand and six,
and those have been replaced by more deposit funding now.
As I said earlier, initially that would be reflected in
higher deposit rates. Of course, que at the time at
suppress deposit rates. And if you recall that before twenty
and twelve, right, we had unlimited deposit insurance on transaction
(18:59):
fought accounts for a while, right, in order to kind
of keep funding stable for banks. What's happened since then, right,
as as interest rates go up, as I said earlier,
banks have been able to compete on non price or
non interest rate services more and the deposits have kind
of remained sticky. So you have this kind of wholesale
shift away from kind of wholesale funding to retail deposits.
(19:24):
And if you want to go back even further, this
looks more akin to an environment that kind of existed,
you know, prior to the nineteen eighties, right, to an
environment where banks were much more deposit reliant and much
less relying on financial products. And if you look back,
you know further, this is kind of really beckons to
(19:47):
an era of you know, kind of pre interest rate
decontrol for nineteen eighty. But again that's that's going back
a lot of many, many many years now, right, So,
depot sets are more important as a source of bank
funding thanks to the experience of the financial crisis and
post GFC regulation, and at the same time, because we've
(20:11):
had things like que a lot of banks are simply
swimming in deposits to the extent that they kind of
have more than they perhaps need, which means that they
are willing to allow depositors to maybe look elsewhere for
better rates. They are However, some banks are losing deposits
(20:35):
faster than other banks. Yes, I wanted you to bring
this up. This is the small bank versus large bank
deposit experience. And also this dovetails with a previous episode
on discount lending, the discount window. I'm sorry I missed
that discount window lending piece, but I think you're exactly
(20:56):
right here, which is that the level of deposits and
the level of bank reserves in the system. That is,
the cash and the liquidity circulating in the system is important,
but so too is the distribution of those balances across institutions.
And what we're seeing is that unlike QT or quantitative
(21:18):
tightening in twenty seventeen, the deposits are leaving right, or
at least the cash is leaving small banks faster than
it's leaving the large banks, and so that the smaller
banks are forced to compete more aggressively in deposit markets
than say they're larger banks. Now, part of this is
(21:41):
a reflection of the fact that when QT occurred, right,
deposit balance is migrated to the largest institutions out there,
again because deposits are heavily concentrated, and so those banks
tended to be more over deposited relatively speaking than the
smaller institutions. That when the FED is braining reserves and
(22:02):
shrinking its balance sheet, the people that have less liquidity
to start off with because they had less fewer deposits,
those are the institutions that are experiencing more deposit rate pressure.
How do the small banks even compete? I mean, I
guess rods as you say, but like, is this like
going to be a permanent condition of banking. This struggle
(22:24):
that the small banks have for deposits relative to these high,
high networked large national banks. Again, you know, small banks
would argue that there are you know, advantages to banking locally,
and that the advantages to banking locally is, you know,
(22:46):
your mortgage lender knows the market right, knows the housing
market in your area, your commercial banker knows your business,
knows your knows you personally, etc. And so there's you know,
So I wouldn't say that it's inevitable that all deposits
(23:06):
will migrate to large institutions, and large institutions will be
selective and paying deposit rates. I still think that there's
enough competition between large and small banks right that you know,
small banks are not going away at all. But again,
this deposit competition that we're experiencing right now is the
(23:28):
aftershock of quantitative easing, right. Quantitative easing and the buying
of treasury securities and mortgages again ended up putting a
lot of deposits into the system as a whole. But
those deposits tended to pile up faster at the larger
institutions than the smaller institutions. So just on that note,
and you already touched on this, but can you dig
(23:49):
in a little bit more into what QT or quantitative
tightening actually means for I guess the effectiveness of monetary
policy is it does it like mechanically ramp up that
competition for depositors, or does it maybe encourage some sort
of substitution effect where you know, banks can I don't know,
(24:12):
replace bank deposits with great sensitive treasuries or something like that.
That's again an important distinction, and I think what you
have to look at here is the demand curve or
bank reserves, right. This is the liquidity that's in the system,
created from quee right from the asset side of the
(24:32):
fed's balance sheet, and these reserves are used to me
int day requirements for settling payments as well as liquidity
requirements for regulatory purposes that banks are required to maintain.
And as the FED lets the assets on its balance
sheet roll off right and doesn't replace them, so that
(24:55):
it's balance sheet shrinks, bank reserves go down, right, and
the decline in bank reserves is what forces banks right
ultimately to compete more aggressively in deposit markets because they
need to restore that cash position on their balance sheet.
In addition to the fact that their assets growing, right,
(25:15):
they're making loans, they need to replace that funding. The
extent to which QT creates reserve pressure, right, is what
creates the pressure on the FED funds rate. Right, the
Fed's policy instrument and determines ultimately where the FED funds
rate trades within its target band. Right. So what the
(25:38):
FED wants to do is, if you think about the
demand curve, demand curve is probably for bank reserves is
probably I'm going to get this wrong concave shape, right,
so it kind of caves in in the middle, and
when you get to the upper part of the demand curve, right,
you're in the steep slope. The steep slope of that
(26:01):
demand curve means is that changes in the level of
bank reserves creates significant changes in interest rates. And the goal,
right from the Fed's perspective, is merely to shift the
supply of bank reserves so that it's in the gently
sloping part of the demand curve. Right, that the level
(26:21):
of bank reserves is ample, right, but not abundant. An
ample means that it's not scarce, right, so that the
level of the Fed funds are a relative to other
market rates or within the band. Right, it's comfortably in
the middle. Right. Remember, the Fed is is targeting a
twenty five bases point band between the top and the
bottom of the Fed funds rate, and the goal is
(26:44):
to kind of keep the Fed funds rate, you know,
within the midpoint, let's say, of that band, right or
close to that midpoint. So again, you want to stay
away from the steep part of the demand curve. But
it's the same respect right, unless you're you know, substantial
easing policy and you've pushed rates to zero. You also
(27:04):
want to stay away from the super platform of the
demander right where you've got bank reserves and access. At
four trillion dollars, interest rates are totally unresponsive to the
level of liquidity in the system because you've effectively driven
rates to zero. Right. So again that's that's kind of
a long winded way of describing what the goal of
QT is, Right, create enough pressure on interest rates but
(27:27):
not too much. How do you have an estimate for
how small the fit is going to shrink its balanchid ultimately? So, uh,
(27:48):
this is pretty complicated, and I think you have to
be pretty humble, we should ask what the level of
ample excess reserves is too, just to get all the
all the loaded questions out there, all right, So my
sense is that the level of ample reserves is probably
around two point seven trillion dollars. But I'm a little
(28:12):
bit cautious about that because I think the level of
reserves is less important than the ratio of reserve balances
is to the total cash total assets that banks have.
So that if you look at twenty nineteen, when we
saw all that bank reserves got too thin, we saw
(28:34):
that going back to our demand curve, right, the ratio
of bank cash assets to total assets strength below eight percent.
So the eight percent mark is kind of the threshold
that divides ample from scares, and so my senses, you
want to keep bank reserves in terms of ample around
(28:56):
eight percent or higher. Right at the moment, they're around
nine percent. If you break that number down between domestic
banks and small banks, right, you see a very different picture. Right,
domestic banks, that ratio is around ten and a half percent,
and they're probably still two percentage points or more away
(29:18):
from that twenty nineteen level where they were scarce. If
you look at small banks, they're around six percent sense,
and that's much closer to where they were in twenty nineteen.
So as we were talking about before, you know ample, right,
in an aggregate sense, you would definitely say that bank
(29:39):
reserves are ample, But in a relative sense, in terms
of the distribution between large and small banks, it's not
clear that there's as much ampleness of bank reserves than
the numbers suggest. I just have one more question, which is,
you know, in the interests of I guess, both financial
(30:00):
stability and the effective transmission of monetary policy and fighting inflation,
should we all be going out and finding the best
deposit deals for ourselves. Should we all be moving our
money around? Is this helpful? Yeah? I mean everybody wants
to earn more money, so I would expect that people
(30:22):
would migrate their balances to hire yielding products. And the
closest substitute for bank deposit at this point is a
money market fund. And the curious thing is that money
market funds are not experiencing inflows, right, So money market
fund balances are paying about four percent or more in
(30:44):
terms of seven day yields, right, So you can definitely
earn more than the twenty three basis points you mentioned
right in a government only money market fund. And what's puzzling,
at least to me, is that, given that difference between
what you can earn a money market fund and a
bank deposit, right, why aren't money fund balances going up? Right?
(31:07):
Why aren't they significantly higher than they are right now?
And I suspect right that there are two reasons for this, right.
One is that on the retail side, we are seeing
some level of interest rate sensitivity, but people are moving
into higher yielding products than government only money market funds.
(31:27):
And in fact, what they're doing is they're moving into
prime money market funds. And the prime money market funds
won't go into this sort of the details, but they
buy commercial paper and other credit instruments right, all short maturity,
but they earn a little bit more than a government
only money market fund. And so if you're an interest
(31:47):
rate since it's investor right, and you're looking for higher yields,
you're going to migrate into the prime funds. And what
we've seen is prime fund balances have gone up sharply
in the last at least since lift off. When you
look at institutional investors, I think what institutional investors are
doing is they're buying bills, right, They're looking at bill
yields and saying bill yields are significantly higher than what
(32:10):
I can get on a money market fund, right, And
so I'm going to buy bills rather than invest in
money market fund because I can earn higher yews. What
I do not think is true is that I do
not believe that multiple years of quantitative easing have somehow
suppressed interest rate sensitivity among investors so that they no
(32:32):
longer care about four percent yields in money market funds
and it will be happy to earn twenty three basis
points in a bank deposit and not move I suspect.
And we are seeing this as money is coming out
of deposits, but it's migrating into higher yielding stuff and
not necessarily governmental in money market funds at least for now. Okay, Joe,
(32:55):
that was a fantastic explanation of how this all works.
Thank you so much for coming on all lots. You
fulfilled a long held dream of mine to get you
on the show. So thank you so much. All right,
thank you. By now, so, Joe, I thought that was
(33:21):
not just an interesting walk through the question at hand,
which is why aren't banks raising deposit rates? But also
kind of a really nice overview of how the monetary
policy interaction with the financial system has actually changed since
the two thousand and eight financial crisis. No, I mean
I was like really interesting, like that sort of headline question,
why why don't they raise rates? But also like I
(33:43):
was just sort of curious, like how do banks work?
You know, like what is seriously like what is the
role of deposits? No, now you're like, why isn't more
money flowing into government money market funds? Well? Yeah, I
mean seriously, but I mean all these things like over time,
like the policy changes that were made, you know, post grant,
post grade financial crisis that sort of put this premium
(34:05):
on deposits. You know, there's this stat that I have
seen and heard that like you're more likely to get
divorced than to ever change banks in your life. Yeah,
and so what I've heard, and I don't know if
it's true. Other you know who knows is our frequent
guest Patrick McKenzie has written about this. But why do
banks still have these physical Yeah? Because if they could
(34:25):
just I've heard that if they could just get like
a few people in the door you're worth so much
money over the course of the lifetime as a customer,
even though no one goes into those retail things. And
it's partly because no one never really switched at banks.
I think it is like a phenomenally sticky business model.
And I remember when I went to university in London.
I remember banks pitching these student programs, and if I
(34:48):
was still in London, I think I would still be
with the bank that like recruited me when I was
a college student. It's weird because I think, like intuitively,
you'd think with the Internet that look that moving money
from one of to another would be more liquid, yeah,
more easy, But somehow it seems like the opposite, because
you have all these apps and you have passwords, and
you have bills connected to your account, and so I
(35:10):
feel like I'm going to change your banks, Like that's
so many things to switch, it's just not worth it.
The network effect, Yeah, the same thing that dollar dominance
and Twitter dominance and Facebook dominance. Even though it's all
it's it's network effects all the way down. So the
two other things I thought were really interesting, just very quickly,
are that idea of reserve scarcity, and this is something
(35:30):
that came up with Bill Nelson when we were talking
about why have we seen this tick up in discount
lending to the banks. This idea that even though we
still have a lot of reserves and liquidity in the system,
they are not evenly distributed. Yeah. And then secondly this
idea that as quantitative tightening really kicks into gear, you
might start to get this process where deposit rates start
(35:54):
going higher and there is that substitution effect. Yeah, and
the fact that like you can't actually or you're the
you're only gonna go get so far taking a crude
measure of cash to total assets. Because of this very
difference and model between the big domestic banks and the
small banks and how they make the smaller banks might
(36:14):
run into liquidity scarcity a lot faster than the larger banks.
So you know, can see why analysts like Joe are
in demand because it's not as simple as just sort
of like looking at one number and dividing by another number. Totally,
banking is not a monolith. Also, everyone should go deposit
rate shopping in order to aimate more money and improve
(36:37):
the monetary policy mechanism worse inflation. Will all be getting
more income and more income, the last thing that we
all need right now. If I had, if I was
a fintech, you guys are, and I'd be spending that money. Okay,
we're back to the circular nature of like prices going
down and then increasing prices, and then we never get
out of it. Shall we leave it there? Let's leave
it there. This has been another episode of the All
(36:59):
Thoughts Past. I'm Tracy Alloway. You can follow me on
Twitter at Tracy Alloway and I'm Joe Why isn't thall?
You could follow me on Twitter at the Stalwart, follow
our producers Kerman Rodriguez at Kerman Ermine and Dash Bennett
at dashbot, and check out all of our podcasts here
at Bloomberg into the handle at podcasts, and for more
Odd Lots content, go to Bloomberg dot com slash odd Lots,
(37:21):
where we blog, we post transcripts. We have a weekly
newsletter comes out every Friday. Go there and sign up.
Thanks for listening.
Hosts And Creators
Joe Weisenthal
Tracy Alloway
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