Home Personal Finance American savers are conveniently put on the water and switched banks

American savers are conveniently put on the water and switched banks

American savers are conveniently put on the water and switched banks

By Natalie ShermanBusiness Reporter, New York

April 16, 2023

image source, Getty Images

A wave of transfers is hitting US banks as a sharp rise in interest rates after years of low borrowing costs creates more opportunities for savers – and new challenges for banks.

Until recently, software engineer Claire Long put all of her money into a checking account she opened years ago as a college student. She had thousands of dollars accrued there despite the paltry interest.

The prospect of earning 4% or more shook up her complacency. This month she transferred $20,000 (£18,000) to another bank that offered a higher interest rate.

“I never paid attention. I just left my money in the account,” says the 26-year-old, who lives in Massachusetts and credits a personal finance podcast for warning her of better options.

“I don’t want my money to sit in one place. I want to get the most out of it.”

Banks have been paying notoriously low savings rates for years – something that hasn’t changed at many of the biggest firms, despite the fact that the US Federal Reserve raised its benchmark interest rate from near zero to more than 4.75% in just a year.

But there are signs that the sharp rise is beginning to shake the status quo, upsetting a financial system accustomed to relying on cheap deposits as a major source of funding and profit.

image source, Claire long

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Claire Long recently transferred $20,000 to a new bank offering higher interest rates – part of a wave of transfers hitting the financial system

“It’s a competitive market,” JPMorgan Chase chief financial officer Jeremy Barnum told investors Friday, when the company reported average deposits were down 8% from a year ago.

About 30% of U.S. bank customers moved money from their primary account to another bank in March, compared to 27% in the previous year, according to a survey by JD Power, a consumer information research firm.

A third said they were moving to higher rates, compared to a quarter a year earlier.

That’s a “slow climb,” said Paul McAdam, senior director of banking at JD Power. “But extrapolate this over millions of consumers and it makes a difference.”

Questions about how banks will handle the change became sharp last month after the US was hit by its two biggest bank failures since the 2008 financial crisis.

In the weeks following the collapse of Silicon Valley Bank and Signature Bank, billions of dollars in deposits changed hands, shocking a system accustomed to savings serving as a stable source of funding.

While that rush seems to have eased, many banks say they expect consumers to continue to search for the best deals, as online banking makes shifting money easier than ever and rapid price inflation leaves people unusually susceptible to the erosion of the strength of their savings.

“Consumers are more aware of how their returns compare to the loss of purchasing power,” said Greg McBride, chief financial analyst at Bankrate.com, which has tracked consumer interest rates for decades. “They have taken note of the higher yields available at some banks and not others and have moved their savings accordingly.”

Many people, like Claire, are switching allegiances to open new high-interest or money market savings accounts, which can pay interest rates of 3.5% or more, compared to the average interest rate of 0.24% on a traditional savings account, according to data collected by Bankrate.

Others withdraw their money entirely from the banks and opt for other types of investments, such as US Treasury bonds or money market funds, which purchase short-term government and corporate debt with relatively low risk and can offer interest rates above 4.5%. but offered little advantage over a savings account at a low interest rate.

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Money moved to big banks and money market funds after the collapse of Silicon Valley Bank

The moves led bank deposits in the US to fall for the first time in decades last year, falling by more than $200 billion from a year earlier at the end of December, according to Federal Reserve data. Fitch expects deposits to fall another $1.6 trillion this year.

“Banks and policymakers were ready for the deposit outflows that happened in February. What is certainly the case now is that we have more uncertainty about whether the outflows will prove to be greater than historical norms,” said Alexi Savov, professor of finance at New York University Stern School of Business.

The decline in deposits so far is still consistent with what typically happens when interest rates rise.

Overall, the banking system remains awash in cash, reflecting the unprecedented rise in deposits during the pandemic, as savings rates rose and government support programs made people’s accounts fat.

But there are many concerns about what lies ahead for the economy as the resources available for borrowing dwindle.

Analysts say some banks, especially the largest, can afford to lose some of their excessive deposits without much of an impact on profits or activity.

But Prof Savov says the outflow will put pressure on others, especially smaller regional companies, hurting profits and driving them to withdraw their loans – with potentially serious consequences for local economies and some business sectors, such as commercial real estate, where regional banks play a role. big roll.

The recent bank failures caused a sharp acceleration in the outflow of those smaller players, he notes.

image source, Getty Images

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Some banks pay more to hold depositors

“It creates a much higher risk of a bumpy landing, possibly a recession,” says Prof Savov. “It’s just such a live ball.”

The growth of money market funds, which saw their holdings soar in the weeks following the banking crisis, has sharpened the removal of money from the economy as the funds play no direct role in lending while they have the option to park their holdings with the US Federal Reserve, says Steven Kelly, a senior research associate in the Yale School of Management program on financial stability

Their growth also threatens to make the financial system more unstable, as the companies responsible for such investments flee quickly at any sign of trouble, unlike ordinary savers, who can count on the government guaranteeing bills of up to $250,000, he adds. .

“An insured depositor may not flee at the first sign of bad news,” he says, but a money market fund is likely to “disappear overnight.”

If the economy runs into serious trouble, the US central bank is expected to cut interest rates – a scenario many investors are more likely to see happen after the banking panic.

That means rebalancing deposits, as people like Claire seek more for their savings, could also prove to be short-lived.

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