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Analysis from TD on how banks (Wells Fargo, US Bankcorp, JPMorgan, M&T, PNC, Citi) rushed to hike the prime rate to 3.50%, and forgot to increase the deposit ra

Analysis from TD on how banks (Wells Fargo, US Bankcorp, JPMorgan, M&T, PNC, Citi) rushed to hike the prime rate to 3.50%, and forgot to increase the deposit rate: As CNBC reported [1], "a change in the federal funds rate will have no impact on the interest rates on existing fixed-rate mortgage and other fixed-rate consumer loans, a Wells Fargo representative told CNBC. Existing home equity lines of credit, credit cards and other consumer loans with variable interest rates tied to the prime rate will be impacted if the prime rate rises, the person said." The good news: the rates on mortgages, auto loans or college tuition aren't expected to jump anytime soon, according to AP, although in time those will rise as well unless the long-end of the curve flattens even more than the 25 bps increase on the short end. What about the other end of the question: the interest banks pay on deposits? Well, no rush there: "We won't automatically change deposit rates because they aren't tied directly to the prime," a JPMorgan Chase spokesperson told CNBC. "We'll continue to monitor the market to make sure we stay competitive." Bottom line: for those who carry a balance on their credit cards, their interest payment is about to increase. Meanwhile, those who have savings at US banks, please don't hold your breath to see any increase on the meager interest said deposits earn: after all banks are still flooded with about $2.5 trillion in excess reserves, which means that the last thing banks care about is being competitive when attracting deposits. [1] http://www.cnbc.com/2015/12/16/wells-fargo-bank-announced-wednesday-it-would-increase-its-prime-rate-to-35-percent.html http://www.cnbc.com/2015/12/16/wells-fargo-bank-announced-we...

toomuchtodo 11y ago
> Existing home equity lines of credit, credit cards and other consumer loans with variable interest rates tied to the prime rate will be impacted if the prime rate rises, the person said. > "We won't automatically change deposit rates because they aren't tied directly to the prime," a JPMorgan Chase spokesperson told CNBC. "We'll continue to monitor the market to make sure we stay competitive." Heads I win, tails you lose.
- gohrt 11y ago
  Does it matter though? 21st Century, everyone with savings can open a Vanguard mutual fund account with the risk/reward profile of their choosing, that's almost as convenient wrt withdrawals.
  - toomuchtodo 11y ago
    I have yet to be convinced there's no downside to everyone piling into ETFs in Vanguard. Also, funds are traditionally not FDIC insured as checking and savings accounts. Money market funds have broken the buck before. Its rare, but can happen.
    - deleted 11y ago
      [deleted]
    - nostrademons 11y ago
      The downside of everyone piling into index funds isn't something systemic that'll bring down the financial system the way the real estate bubble did. Rather, it's that the capital market as a whole becomes less efficient. All the money parked in index funds is money whose owners did no due-diligence about where they put it; it means that if reality changes and the value of the underlying businesses goes up or down, the index fund will be the last to profit from it, and we can expect price changes in the stock market to lag fundamental changes in the businesses by a greater time period. The effect of this is basically that returns for active smart-money investors go up, as there's less competition amongst folks actively trying to discover new relevant business facts. We see this already - a lot of the wealth-creation in Silicon Valley is because folks who have an information advantage can invest in new private businesses before the general public is willing or able to invest in them, creating large private fortunes. But because the price mechanism lags the business reality in this case, you don't have crises where a large number of people suddenly find out that they are poorer than they expected, like the 2008 housing bust and 2001 dot-com crash. Rather, you end up with chronic societal inequality where a small number of people end up with fortunes that everyone else thinks are implausibly large.
      - 11y ago
- lmm 11y ago
  To be fair mortgage rates are often explicitly, contractually tied to prime rates, whereas savings rates generally aren't.
CydeWeys 11y ago
There is a sticky price effect, but interest rates on savings accounts will inevitably rise as the prime rate increases, as banks compete with each other for customer business. Yes there will be lag time, but it will happen.
- theGimp 11y ago
  I'm not sure if the Fed pulled back the trillions it pumped into the banks during the crisis, but until that happens, banks don't have a real incentive to compete for deposits.
  - raverbashing 11y ago
    Correct, that's the real issue .
  - eru 11y ago
    And isn't that how it should work? The extra money around is supposed to make people do something with their money apart from depositing it with a bank.
    - Swizec 11y ago
      You mean like have a safety net so that you can take more risks? There's a lot more you can do with cashflow when you have some fuck you money. ;) For reference: http://imgur.com/gallery/MdA04 http://imgur.com/gallery/MdA04
    - theGimp 11y ago
      The money didn't go to people. It went to banks. The reason the Fed issued the money to banks is so they don't collapse. Why would they collapse? Banks use deposits as collateral to make investments. During the crisis, a lot people and institutions were panicking and withdrawing whatever they had in the market. So the Fed issued a bunch of money and loaned it to banks on generous terms to prevent a Domino effect where institutions fail one by one. It's probably what prevented a giant meltdown of the economy. It also changed the dynamic for the banks. They were loaned trillions by the Fed for next to nothing -- much better deal than fighting over people's deposits. So we won't see deposit interest rise until some of that money is taken away. (My understanding is that hasn't happened.) A couple years ago, the Fed paid the banks to sit on that money and not use it, but I'm not sure if that's related. Somebody more informed might be able to fill that gap.
cperciva 11y ago
forgot to increase the deposit rate: I don't think there was any forgetting involved.
superuser2 11y ago
>a change in the federal funds rate will have no impact on the interest rates on existing fixed-rate mortgage and other fixed-rate consumer loans >Existing home equity lines of credit, credit cards and other consumer loans with variable interest rates tied to the prime rate will be impacted if the prime rate rises, the person said That is literally what fixed and variable rates mean, so I hope it isn't surprising to anyone.

toomuchtodo 11y ago

> Existing home equity lines of credit, credit cards and other consumer loans with variable interest rates tied to the prime rate will be impacted if the prime rate rises, the person said. > "We won't automatically change deposit rates because they aren't tied directly to the prime," a JPMorgan Chase spokesperson told CNBC. "We'll continue to monitor the market to make sure we stay competitive." Heads I win, tails you lose.

gohrt 11y ago
Does it matter though? 21st Century, everyone with savings can open a Vanguard mutual fund account with the risk/reward profile of their choosing, that's almost as convenient wrt withdrawals.
- toomuchtodo 11y ago
  I have yet to be convinced there's no downside to everyone piling into ETFs in Vanguard. Also, funds are traditionally not FDIC insured as checking and savings accounts. Money market funds have broken the buck before. Its rare, but can happen.
  - deleted 11y ago
    [deleted]
  - nostrademons 11y ago
    The downside of everyone piling into index funds isn't something systemic that'll bring down the financial system the way the real estate bubble did. Rather, it's that the capital market as a whole becomes less efficient. All the money parked in index funds is money whose owners did no due-diligence about where they put it; it means that if reality changes and the value of the underlying businesses goes up or down, the index fund will be the last to profit from it, and we can expect price changes in the stock market to lag fundamental changes in the businesses by a greater time period. The effect of this is basically that returns for active smart-money investors go up, as there's less competition amongst folks actively trying to discover new relevant business facts. We see this already - a lot of the wealth-creation in Silicon Valley is because folks who have an information advantage can invest in new private businesses before the general public is willing or able to invest in them, creating large private fortunes. But because the price mechanism lags the business reality in this case, you don't have crises where a large number of people suddenly find out that they are poorer than they expected, like the 2008 housing bust and 2001 dot-com crash. Rather, you end up with chronic societal inequality where a small number of people end up with fortunes that everyone else thinks are implausibly large.
    - 11y ago
lmm 11y ago
To be fair mortgage rates are often explicitly, contractually tied to prime rates, whereas savings rates generally aren't.

CydeWeys 11y ago

There is a sticky price effect, but interest rates on savings accounts will inevitably rise as the prime rate increases, as banks compete with each other for customer business. Yes there will be lag time, but it will happen.

theGimp 11y ago
I'm not sure if the Fed pulled back the trillions it pumped into the banks during the crisis, but until that happens, banks don't have a real incentive to compete for deposits.
- raverbashing 11y ago
  Correct, that's the real issue .
- eru 11y ago
  And isn't that how it should work? The extra money around is supposed to make people do something with their money apart from depositing it with a bank.
  - Swizec 11y ago
    You mean like have a safety net so that you can take more risks? There's a lot more you can do with cashflow when you have some fuck you money. ;) For reference: http://imgur.com/gallery/MdA04 http://imgur.com/gallery/MdA04
  - theGimp 11y ago
    The money didn't go to people. It went to banks. The reason the Fed issued the money to banks is so they don't collapse. Why would they collapse? Banks use deposits as collateral to make investments. During the crisis, a lot people and institutions were panicking and withdrawing whatever they had in the market. So the Fed issued a bunch of money and loaned it to banks on generous terms to prevent a Domino effect where institutions fail one by one. It's probably what prevented a giant meltdown of the economy. It also changed the dynamic for the banks. They were loaned trillions by the Fed for next to nothing -- much better deal than fighting over people's deposits. So we won't see deposit interest rise until some of that money is taken away. (My understanding is that hasn't happened.) A couple years ago, the Fed paid the banks to sit on that money and not use it, but I'm not sure if that's related. Somebody more informed might be able to fill that gap.

cperciva 11y ago

forgot to increase the deposit rate: I don't think there was any forgetting involved.

superuser2 11y ago

>a change in the federal funds rate will have no impact on the interest rates on existing fixed-rate mortgage and other fixed-rate consumer loans >Existing home equity lines of credit, credit cards and other consumer loans with variable interest rates tied to the prime rate will be impacted if the prime rate rises, the person said That is literally what fixed and variable rates mean, so I hope it isn't surprising to anyone.