Depositors realizing they can earn 4% on safe short term T-Bills while they get close to 0% on bank deposits. This is a key source of continued bank runs. The free lunch that banks used to get on free deposits is ending. Interest sensitivity of deposits is sharply rising
Depositors realizing they can earn 4% on safe short term T-Bills while they get close to 0% on bank deposits. This is a key source of continued bank runs. The free lunch that banks used to get on free deposits is ending. Interest sensitivity of deposits is sharply rising
@Nouriel And continued bank runs are a key source of continued bank runs.
@Nouriel Is a savings account not a bank deposit? Some banks actually pay reasonable rates there instead of cheating their customers. Don’t have to leave the institution for yield. Can just play between checkings and savings (and CDs, equities, etc… if you want even more)
@Nouriel Yes. But the problem is: after a decade of ZIRP the banks assets yield so little that they can’t pay anything more on deposits without giving up profitability. The banking system is trapped by the FED
@Nouriel Yes. But the problem is: after a decade of ZIRP the banks assets yield so little that they can’t pay anything more on deposits without giving up profitability. The banking system is trapped by the FED
@Nouriel Many of us saying this for almost a year now. Banks have refused to raise deposit rates. Raghu Rajan devoted 2022 Jackson paper to bank deposit declines. Everyone has known; bank CEOs said with a half smile that they need a war chest for harder times and raked in extra profits.
@Nouriel @BillAckman One word to add: “get 0% on *riskier* bank deposits ..”
@Nouriel @BillAckman It is the sudden rise in rates. As their liability (deposit) costs are rising, banks desperately need new loan assets at higher rates. I’m being flooded with inquiries from lenders about upcoming projects.
@Nouriel The banks are offering high-yield deposits and term deposits that offer similar rates. But overall, Banks expected the excess deposits to run out as the economy starts to open up and businesses start to invest/expand again. With the Fed pulling liquidity, it accelerates.
@Nouriel The same issue applies here in the UK: with less urgency, because so few bank depositors have a mechanism for retail investing in short UK govt paper, but it’s the same underlying structural crux. I’ve been doing it myself, redeploying bank deposits into 6m gilts at 3.7% plus.
@Nouriel It also means all the liquidity is going to the government (more public sector) and not into the private sector. This means the government continues to prop up the economy.