6 ms·

The issue is that there is no incentive for banks to increase interest rates on accounts as they are already sitting on too much cash. Banks make money by lendi

The issue is that there is no incentive for banks to increase interest rates on accounts as they are already sitting on too much cash. Banks make money by lending money out, in times where banks are strapped for cash on hand, you will see interest rates increase. I don’t see this changing in the near future.

Consultant32452 4y ago
Yep, the reserve rate has been at 0% for years. Bump that back up and watch savings interest skyrocket.
clairity 4y ago
> "...there is no incentive for banks to increase interest rates on accounts as they are already sitting on too much cash." and folks wonder why banks are so strictly regulated... no, banks are never sitting on too much cash unless they've made a marketing and/or an operational error. most banks are highly levered, meaning they're lending out, say, 10× the cash they hold, so they never "have too much cash on hand". quite the opposite. banks continually lobby regulatory agencies to raise their leverage thresholds so they can lever up even more and rake in more of that sweet, nearly risk-free[0] cash flow. that they don't raise savings rates is purely out of greed, not necessity. they're also under no competitive pressure to do so, which indicates a malfunctioning market (functioning markets are by definition competitive). and more galling, they charge you hidden fees out the wazoo for the "privilege" of banking in a mine field. banks are core infrastructure, much like roads and housing. i'd rather go back to a simpler form where banks were only allowed to make money on the spread between lending and savings rates, making them boring and having to compete (with higher savings rates, for example) for your business. all the risk-taking extensions to banking can still exist, just in a separate, firewalled entity with no access to that (nearly) risk-free cash flow. [0]: risk-free in the finance sense of being free of idiosyncratic risk, not systemic risk.
- WalterBright 4y ago
  > purely out of greed People want to collect interest on their bank deposits purely out of greed, too.
  - PaulDavisThe1st 4y ago
    Covering inflation is greed?
    - LeapingLennie 4y ago
      Any rational investor isn't going to be aiming to cover inflation, they are going to be trying to maximize their rate of return. It wouldn't matter if the interest rate was above or below the inflation rate, investors will always shop around to find the highest return they can get. I think "greed" is an unhelpful term as it is too emotionally charged for what is really just rational behaviour given economic incentives. So I would avoid calling banks greedy for trying to maximize profit by offering low interest rates just as I would avoid calling consumers greedy for choosing the bank that gives them the highest interest rate.
      - deleted 4y ago
        [deleted]
- 0xbadcafebee 4y ago
  > functioning markets are by definition competitive Depending on your definition of 'competition' and 'functioning'. There are markets that aren't competitive but are functioning, and markets that are competitive but aren't functioning.
- hestefisk 4y ago
  Banks don’t lend out 10x their deposits. There’s something called loan-to-deposit ratio, which has to sit around 80% for a healthy, well-run bank.
- exabrial 4y ago
  > I'd rather go back to a simpler form where banks were only allowed to make money on the spread between lending and savings rates, making them boring and having to compete (with higher savings rates, for example) for your business I'm truly interested in what's happening now and why this _is not_ the case. Can you elaborate on what they're doing now to make now, rather than making on the spread?
- appleiigs 4y ago
  Yes, they are sitting on too much cash. There was a WSJ article titled "CFOs Seek High Returns on Cash, but Banks May Be Slow to Raise Rates". The article says "That's due to the size of the cash piles sitting at banks - both from companies and consumers - and the loan-to-deposit ratio, which measures the amount of deposits being handed out as loans which has been hovering at decade lows around 60% in recent quarters".
- anm89 4y ago
  no. this is ridiculous. you've demonstrated a total lack of understanding of how a bank manages its balance sheet. Banks are awash in reserves and in the basel3 regime these reserves fulfill a similar role to cash in fulfilling bank balance sheet construction requirements. so the banks are not constrained from a lending perspective by a lack of cash and therefore have no incentive to raise rates to attract new deposits to create a base to lend off of. so from the perspective of why rates are low, it's absolutely because banks are sitting on a lot of cash.
  - missedthecue 4y ago
    Your comment could have gone without the first line.
- standardUser 4y ago
  Sounds like you're calling for a return to Glass–Steagall, which was repealed by a bipartisan vote under a Democratic president in 1999. https://en.wikipedia.org/wiki/Glass%E2%80%93Steagall_legislation https://en.wikipedia.org/wiki/Glass%E2%80%93Steagall_legisla...
  - jpgvm 4y ago
    Some of it was re-instated with Dodd-Frank but ultimately I think it was insufficient, a return to Glass-Steagall would be a more ideal world for banking but will probably never happen in America as it stands today.
    - NaturalPhallacy 4y ago
      America will fall before the banks let the government regulate them in any meaningful way.
      - throw123123123 4y ago
        Banks are so regulated that you can't open an account in the US unless you visit a bank branch physically.
        reificator 4y ago
        This is clearly not true given the number of banks with no physical branches.
        Kranar 4y ago
        This is simply untrue. Marcus is a fully licensed online-only bank, they have no physical branches whatsoever and everything is done through their website: https://www.marcus.com/us/en https://www.marcus.com/us/en There's also Green Dot Bank which is what Apple Pay uses among other mobile payment systems. They technically have a single physical branch but you don't ever need to visit it in order to open a savings/checking account with them: https://www.greendot.com/about-us https://www.greendot.com/about-us
- headmelted 4y ago
  You’ve just described the Glass-Steagall act. It has a long and storied history. It was created in response to the Great Depression, then repealed by the Gramm-Leach-Bliley act because money. Then the Dodd-Frank act tried to have it reinstated but failed, also because money. You may already be familiar with all of this but mentioning in case you’re not. (https://en.m.wikipedia.org/wiki/Glass–Steagall_legislation https://en.m.wikipedia.org/wiki/Glass–Steagall_legislation) There’s a quite brilliant documentary that came out in 2010, Inside Job, that covers this, but which was completely overshadowed by the much less informative The Big Short which came out 5 years later.
  - westurner 4y ago
    There was a separation between savings and investment banking between ~1933-1999. Glass–Steagall in post-financial crisis reform debate: https://en.wikipedia.org/wiki/Glass%E2%80%93Steagall_in_post-financial_crisis_reform_debate https://en.wikipedia.org/wiki/Glass%E2%80%93Steagall_in_post... (Edit: Monetary policy / Monetarism > Current State , Liquidity trap > Global financial crises of 2008 and 2020: https://en.wikipedia.org/wiki/Liquidity_trap https://en.wikipedia.org/wiki/Liquidity_trap ) How do microlending and DeFi rates democratize subsidized capital availability? From IL-RFC-1 Interledger Architecture https://interledger.org/rfcs/0001-interledger-architecture/ https://interledger.org/rfcs/0001-interledger-architecture/ : > Settlement for one account MUST NOT depend on the status of any other accounts. > If settlement of one account in the Interledger is contingent on the status of another account or relationship, this could create the threat of cascading risks and failures, similar to problems that occurred during the 2008 global financial crisis. Nodes can protect themselves from such risks by choosing to use settlement technologies such as collateralized payment channels where available. These types of arrangements can provide high-speed settlement without a risk that the other side may not pay. For more information on different ledger types and settlement strategies, see IL-RFC-22: Hashed Timelock Agreements. > Nodes can also choose never to settle their obligations. This configuration may be useful when several nodes representing different pieces of software or devices are all owned by the same person or business, and all their traffic with the outside world goes through a single “home router” connector. This is the model of `moneyd`, one of the current implementations of Interledger.
- clintonb 4y ago
  Banks and credit unions must maintain a Tier 1 Capital ratio set by regulators. T1C is negatively impacted by large deposits.
- jVinc 4y ago
  > most banks are highly levered, meaning they're lending out, say, 10× the cash they hold, so they never "have too much cash on hand". Reconsider what your stating here. If I have 10$, and I can therefore lend out 100$, but I only have requests to borrow 50$, then I have "too much cash". If I however had requests to borrow 200$, the I would need to find another 10$, for instance by promising someone a higher interest rate on their accounts. The fact that banks do fractional reserve does in no way guarantee that they do not end up having more cash on hand than they need to cover the demand for loans.
  - khaki54 4y ago
    The fractional reserve has been set to zero
  - prepend 4y ago
    Thus the reference to a marketing error. Banks that have too much cash on hand go out of business. If a bank ends up being near this it just reduces its loan rates and loans the money out for slightly less, but still better than sitting on cash.
    - mlyle 4y ago
      > Banks that have too much cash on hand go out of business. If a bank ends up being near this it just reduces its loan rates and loans the money out for slightly less, but still better than sitting on cash. Right.. The bank can increase its level of leverage principally by: * Decreasing loan interest rates to encourage people to take loans * and/or decreasing savings interest rates to discourage people from keeping deposits. Of course, real banks do both based on market conditions and capital requirements. And, of course, there's not an implausibly thin level of reserves like you imply to pedantically harass the prior commenter: you must have at least the required reserves, and certainly having way too much cash is toxic to profitability.
- pmalynin 4y ago
  There is literally a trillion dollars too much in cash in banks right now. All of that money just sits in reverse-repo with the Fed. So I don’t know how you’re claiming that banks aren’t sitting on too much cash?
  - thoughtstheseus 4y ago
    Closer to $1.7 trillion last I checked. “Money” is inventory for a bank. You can have too much inventory.
    - missedthecue 4y ago
      Inventory causes problems if you're not moving product.
    - FartyMcFarter 4y ago
      They can give some of it to Ukraine.
      - Thorrez 4y ago
        The bank's customers might not be very happy they the bank gave their money away.
neilwilson 4y ago
Banks don’t lend money out. Never have, never will. Banks are discount houses. They create their own money against financial assets they buy from you with that money. They are factories, not warehouses. Deposit interest rates aren’t going up because there’s nowhere else the money can go. Nobody wants be the retail to wholesale middleman at present.
- lsiq 4y ago
  Thank you, was hoping for someone to point this out. Banks don't take deposits and they don't lend money. Banks create money. When they "lend," what they are legally doing is purchasing a newly issued security for your home. And they are doing so with created money, that money is not transferred from some other account. Similarly when you "deposit," the money is legally now the bank's. The bank now has a liability to you, but it is not a custodial intermediary "holding" your money for you. It is poorly understood that banks are in fact creating credit. Most people believe in either the fractional reserve model of banking or in the financial intermediary model. This is a real problem, because as they create credit to finance existing asset purchases (as opposed to financing new investment) they create asset price inflation & bubbles and foster inequality. Read anything by the brilliant Richard Werner who writes about this extensively, this interview has a short summary of how banks actually work in law: https://youtu.be/EC0G7pY4wRE https://youtu.be/EC0G7pY4wRE https://professorwerner.org/shifting-from-central-planning-to-a-decentralised-economy/ https://professorwerner.org/shifting-from-central-planning-t...
  - chii 4y ago
    > create credit to finance existing asset purchases (as opposed to financing new investment) the seller of that purchase transaction will have received the financing credit as cash. This cash is, in most cases, invested. If the seller had a loan, they might've repaid the loan - but then this repayment would in part, cancel out the credit creation the buyer's bank did. The net outcome, if it was positive, is the profit that the seller obtained, and this is real wealth created. This wealth is often reinvested somewhere - either to purchase existing assets (in which case, this cycle repeats), or to finance a new asset/investment (like a startup). However, the purchasing of existing assets is required for this system to work - like an exit strategy for the initial investors of that asset. Banks doing lending _could_ cause a bubble, if the rate of interest is too low compared to the growth in the economy (the assumption is that there's a limit to how fast you can grow new assets). Whether the past decade since the GFC had too low an interest rate, is up for debate.

Consultant32452 4y ago

Yep, the reserve rate has been at 0% for years. Bump that back up and watch savings interest skyrocket.

clairity 4y ago

> "...there is no incentive for banks to increase interest rates on accounts as they are already sitting on too much cash." and folks wonder why banks are so strictly regulated... no, banks are never sitting on too much cash unless they've made a marketing and/or an operational error. most banks are highly levered, meaning they're lending out, say, 10× the cash they hold, so they never "have too much cash on hand". quite the opposite. banks continually lobby regulatory agencies to raise their leverage thresholds so they can lever up even more and rake in more of that sweet, nearly risk-free[0] cash flow. that they don't raise savings rates is purely out of greed, not necessity. they're also under no competitive pressure to do so, which indicates a malfunctioning market (functioning markets are by definition competitive). and more galling, they charge you hidden fees out the wazoo for the "privilege" of banking in a mine field. banks are core infrastructure, much like roads and housing. i'd rather go back to a simpler form where banks were only allowed to make money on the spread between lending and savings rates, making them boring and having to compete (with higher savings rates, for example) for your business. all the risk-taking extensions to banking can still exist, just in a separate, firewalled entity with no access to that (nearly) risk-free cash flow. [0]: risk-free in the finance sense of being free of idiosyncratic risk, not systemic risk.

WalterBright 4y ago
> purely out of greed People want to collect interest on their bank deposits purely out of greed, too.
- PaulDavisThe1st 4y ago
  Covering inflation is greed?
  - LeapingLennie 4y ago
    Any rational investor isn't going to be aiming to cover inflation, they are going to be trying to maximize their rate of return. It wouldn't matter if the interest rate was above or below the inflation rate, investors will always shop around to find the highest return they can get. I think "greed" is an unhelpful term as it is too emotionally charged for what is really just rational behaviour given economic incentives. So I would avoid calling banks greedy for trying to maximize profit by offering low interest rates just as I would avoid calling consumers greedy for choosing the bank that gives them the highest interest rate.
    - deleted 4y ago
      [deleted]
0xbadcafebee 4y ago
> functioning markets are by definition competitive Depending on your definition of 'competition' and 'functioning'. There are markets that aren't competitive but are functioning, and markets that are competitive but aren't functioning.
hestefisk 4y ago
Banks don’t lend out 10x their deposits. There’s something called loan-to-deposit ratio, which has to sit around 80% for a healthy, well-run bank.
exabrial 4y ago
> I'd rather go back to a simpler form where banks were only allowed to make money on the spread between lending and savings rates, making them boring and having to compete (with higher savings rates, for example) for your business I'm truly interested in what's happening now and why this _is not_ the case. Can you elaborate on what they're doing now to make now, rather than making on the spread?
appleiigs 4y ago
Yes, they are sitting on too much cash. There was a WSJ article titled "CFOs Seek High Returns on Cash, but Banks May Be Slow to Raise Rates". The article says "That's due to the size of the cash piles sitting at banks - both from companies and consumers - and the loan-to-deposit ratio, which measures the amount of deposits being handed out as loans which has been hovering at decade lows around 60% in recent quarters".
anm89 4y ago
no. this is ridiculous. you've demonstrated a total lack of understanding of how a bank manages its balance sheet. Banks are awash in reserves and in the basel3 regime these reserves fulfill a similar role to cash in fulfilling bank balance sheet construction requirements. so the banks are not constrained from a lending perspective by a lack of cash and therefore have no incentive to raise rates to attract new deposits to create a base to lend off of. so from the perspective of why rates are low, it's absolutely because banks are sitting on a lot of cash.
- missedthecue 4y ago
  Your comment could have gone without the first line.
standardUser 4y ago
Sounds like you're calling for a return to Glass–Steagall, which was repealed by a bipartisan vote under a Democratic president in 1999. https://en.wikipedia.org/wiki/Glass%E2%80%93Steagall_legislation https://en.wikipedia.org/wiki/Glass%E2%80%93Steagall_legisla...
- jpgvm 4y ago
  Some of it was re-instated with Dodd-Frank but ultimately I think it was insufficient, a return to Glass-Steagall would be a more ideal world for banking but will probably never happen in America as it stands today.
  - NaturalPhallacy 4y ago
    America will fall before the banks let the government regulate them in any meaningful way.
    - throw123123123 4y ago
      Banks are so regulated that you can't open an account in the US unless you visit a bank branch physically.
      - reificator 4y ago
        This is clearly not true given the number of banks with no physical branches.
      - Kranar 4y ago
        This is simply untrue. Marcus is a fully licensed online-only bank, they have no physical branches whatsoever and everything is done through their website: https://www.marcus.com/us/en https://www.marcus.com/us/en There's also Green Dot Bank which is what Apple Pay uses among other mobile payment systems. They technically have a single physical branch but you don't ever need to visit it in order to open a savings/checking account with them: https://www.greendot.com/about-us https://www.greendot.com/about-us
headmelted 4y ago
You’ve just described the Glass-Steagall act. It has a long and storied history. It was created in response to the Great Depression, then repealed by the Gramm-Leach-Bliley act because money. Then the Dodd-Frank act tried to have it reinstated but failed, also because money. You may already be familiar with all of this but mentioning in case you’re not. (https://en.m.wikipedia.org/wiki/Glass–Steagall_legislation https://en.m.wikipedia.org/wiki/Glass–Steagall_legislation) There’s a quite brilliant documentary that came out in 2010, Inside Job, that covers this, but which was completely overshadowed by the much less informative The Big Short which came out 5 years later.
- westurner 4y ago
  There was a separation between savings and investment banking between ~1933-1999. Glass–Steagall in post-financial crisis reform debate: https://en.wikipedia.org/wiki/Glass%E2%80%93Steagall_in_post-financial_crisis_reform_debate https://en.wikipedia.org/wiki/Glass%E2%80%93Steagall_in_post... (Edit: Monetary policy / Monetarism > Current State , Liquidity trap > Global financial crises of 2008 and 2020: https://en.wikipedia.org/wiki/Liquidity_trap https://en.wikipedia.org/wiki/Liquidity_trap ) How do microlending and DeFi rates democratize subsidized capital availability? From IL-RFC-1 Interledger Architecture https://interledger.org/rfcs/0001-interledger-architecture/ https://interledger.org/rfcs/0001-interledger-architecture/ : > Settlement for one account MUST NOT depend on the status of any other accounts. > If settlement of one account in the Interledger is contingent on the status of another account or relationship, this could create the threat of cascading risks and failures, similar to problems that occurred during the 2008 global financial crisis. Nodes can protect themselves from such risks by choosing to use settlement technologies such as collateralized payment channels where available. These types of arrangements can provide high-speed settlement without a risk that the other side may not pay. For more information on different ledger types and settlement strategies, see IL-RFC-22: Hashed Timelock Agreements. > Nodes can also choose never to settle their obligations. This configuration may be useful when several nodes representing different pieces of software or devices are all owned by the same person or business, and all their traffic with the outside world goes through a single “home router” connector. This is the model of `moneyd`, one of the current implementations of Interledger.
clintonb 4y ago
Banks and credit unions must maintain a Tier 1 Capital ratio set by regulators. T1C is negatively impacted by large deposits.
jVinc 4y ago
> most banks are highly levered, meaning they're lending out, say, 10× the cash they hold, so they never "have too much cash on hand". Reconsider what your stating here. If I have 10$, and I can therefore lend out 100$, but I only have requests to borrow 50$, then I have "too much cash". If I however had requests to borrow 200$, the I would need to find another 10$, for instance by promising someone a higher interest rate on their accounts. The fact that banks do fractional reserve does in no way guarantee that they do not end up having more cash on hand than they need to cover the demand for loans.
- khaki54 4y ago
  The fractional reserve has been set to zero
- prepend 4y ago
  Thus the reference to a marketing error. Banks that have too much cash on hand go out of business. If a bank ends up being near this it just reduces its loan rates and loans the money out for slightly less, but still better than sitting on cash.
  - mlyle 4y ago
    > Banks that have too much cash on hand go out of business. If a bank ends up being near this it just reduces its loan rates and loans the money out for slightly less, but still better than sitting on cash. Right.. The bank can increase its level of leverage principally by: * Decreasing loan interest rates to encourage people to take loans * and/or decreasing savings interest rates to discourage people from keeping deposits. Of course, real banks do both based on market conditions and capital requirements. And, of course, there's not an implausibly thin level of reserves like you imply to pedantically harass the prior commenter: you must have at least the required reserves, and certainly having way too much cash is toxic to profitability.
pmalynin 4y ago
There is literally a trillion dollars too much in cash in banks right now. All of that money just sits in reverse-repo with the Fed. So I don’t know how you’re claiming that banks aren’t sitting on too much cash?
- thoughtstheseus 4y ago
  Closer to $1.7 trillion last I checked. “Money” is inventory for a bank. You can have too much inventory.
  - missedthecue 4y ago
    Inventory causes problems if you're not moving product.
  - FartyMcFarter 4y ago
    They can give some of it to Ukraine.
    - Thorrez 4y ago
      The bank's customers might not be very happy they the bank gave their money away.

neilwilson 4y ago

Banks don’t lend money out. Never have, never will. Banks are discount houses. They create their own money against financial assets they buy from you with that money. They are factories, not warehouses. Deposit interest rates aren’t going up because there’s nowhere else the money can go. Nobody wants be the retail to wholesale middleman at present.

lsiq 4y ago
Thank you, was hoping for someone to point this out. Banks don't take deposits and they don't lend money. Banks create money. When they "lend," what they are legally doing is purchasing a newly issued security for your home. And they are doing so with created money, that money is not transferred from some other account. Similarly when you "deposit," the money is legally now the bank's. The bank now has a liability to you, but it is not a custodial intermediary "holding" your money for you. It is poorly understood that banks are in fact creating credit. Most people believe in either the fractional reserve model of banking or in the financial intermediary model. This is a real problem, because as they create credit to finance existing asset purchases (as opposed to financing new investment) they create asset price inflation & bubbles and foster inequality. Read anything by the brilliant Richard Werner who writes about this extensively, this interview has a short summary of how banks actually work in law: https://youtu.be/EC0G7pY4wRE https://youtu.be/EC0G7pY4wRE https://professorwerner.org/shifting-from-central-planning-to-a-decentralised-economy/ https://professorwerner.org/shifting-from-central-planning-t...
- chii 4y ago
  > create credit to finance existing asset purchases (as opposed to financing new investment) the seller of that purchase transaction will have received the financing credit as cash. This cash is, in most cases, invested. If the seller had a loan, they might've repaid the loan - but then this repayment would in part, cancel out the credit creation the buyer's bank did. The net outcome, if it was positive, is the profit that the seller obtained, and this is real wealth created. This wealth is often reinvested somewhere - either to purchase existing assets (in which case, this cycle repeats), or to finance a new asset/investment (like a startup). However, the purchasing of existing assets is required for this system to work - like an exit strategy for the initial investors of that asset. Banks doing lending _could_ cause a bubble, if the rate of interest is too low compared to the growth in the economy (the assumption is that there's a limit to how fast you can grow new assets). Whether the past decade since the GFC had too low an interest rate, is up for debate.