WSJ Predicts Higher Rates on Deposits
The Wall Street Journal writes, "Why Your Bank Is Going to Pay More for Your Savings Soon." It says, "Investors who keep an eye on their bank statements in the coming year are likely to get a preview of how the Federal Reserve's higher interest-rate target will impact bank earnings. Traditionally, banks benefited from rising interest rates because they held off on raising deposit rates while quickly lifting rates charged on many loans. In prior periods of rate increases by the Fed, deposit rates moved up by around 0.25 percentage point while the prime rate rose much more. This boosted their net interest margins and flowed directly through to the bottom line." The piece speculates, "Anyone counting on this to happen in this rate cycle, however, is probably in for a shock. New banking and money-market fund regulations have dramatically altered the demand for cash in ways that are likely to benefit the retail customers of banks—and weaken bank profits.... Holding off on raising interest paid on many deposits, however, will be more challenging. J.P. Morgan Chase has already increased the rates paid on some deposits. The key difference between this rate-rising cycle and those of the past is the new liquidity coverage ratio regulation. These rules require banks to hold so-called "high-quality liquid assets" that can easily be sold when depositors demand their cash. The amount of high-quality liquid assets required varies depending on the type of deposit." It continues, "Nonoperating deposits -- that is, deposits in excess of an institutional customer's typical payment patterns -- have the highest high-quality liquid-asset requirements. Deposits of customers deemed financial institutions require high-quality assets equal to 100% of their balances, while those of nonfinancial corporate customers get a 25% outflow assumption.... Big banks will be all too happy to see these leave for money market funds. Retail deposits are a different story. Banks need only hold high-quality liquid assets equal to five cents of every dollar of retail deposits.... This means that banks are likely not only to seek to keep the retail deposits they have but lure money away from money market funds. To do this, banks likely will have to raise their bids for retail cash at a faster clip than in the past." See also, American Banker's "What Money-Market Reform Means for Banks", which says, "Banks that are dependent on money funds for wholesale funding will be hardest hit because that funding would probably become more expensive. Banks that sponsor money funds could lose revenue, or may even have to sell the funds if they can't absorb the cost of the new regulations. But other banks may find institutional depositors who pulled cash from money funds knocking on their door."
