6 ms·

Small banks don’t like high rates

51 points by feross 3y ago

ioblomov 3y ago
https://archive.ph/xSRNU https://archive.ph/xSRNU
mint2 3y ago
This sounds like a feel good historical take, not a recent change. And as the largest retail banks offer zero interest, it doesn’t quite mesh with that narrative.
- lotsofpulp 3y ago
  Technically, Chase offers 4.2% for FDIC insured savings accounts and BoA offers 4.76%. The caveat is you have to deposit $100k first (you can draw down and deposit more anytime after that and maintain the account even with just $1). https://www.jpmorgan.com/wealth-management/premium-deposit https://www.jpmorgan.com/wealth-management/premium-deposit https://olui2.fs.ml.com/Publish/Content/application/pdf/GWMOL/ICCRateSheet.pdf https://olui2.fs.ml.com/Publish/Content/application/pdf/GWMO...
  - mint2 3y ago
    Interesting, that’s not typical product though
    - lotsofpulp 3y ago
      I would recommend these at 4.95% and 4.6%: https://www.cit.com/cit-bank/platinum-savings https://www.cit.com/cit-bank/platinum-savings https://www.cit.com/cit-bank/bank/savings/savings-connect-account https://www.cit.com/cit-bank/bank/savings/savings-connect-ac... CIT is a subsidiary of First Citizens, which is 19th on the list of US banks on Wikipedia.
- wonnage 3y ago
  > And as the largest retail banks offer zero interest, it doesn’t quite mesh with that narrative. The point is that large banks have a win-win right now - higher rates make it easier for them to make money, but the fact that people were spooked by regional bank failures means that they don't need to turn around and offer higher rates to attract deposits.
opportune 3y ago
The article is kind of all over the place. Anyway, to me bank consolidation is a relatively obvious outcome of digital banking + economies of scale + too big to fail. While it’s true local banks provide a public local benefit, they are IME just inefficient - tons of brick and mortar, overly reliant on upselling you on services that are frankly rip-off’s. The large physical and human presence basically means your ROI as a customer is capped due to poor unit margins. Another thing I really dislike about businesses at this scale is they are very often nepotistic. Where I’m from it’s very common for businesses to pass from generation to generation - your career is really capped if you’re not “in”. One of the nice things about huge corporations is that they’re a bit more merit-based in who they hire. Are small businesses cute and quaint, sure, but I don’t feel bad for them.
- sclarisse 3y ago
  I think the sponsorship story is particularly overrated. You don’t see small banks lending to the sandwich shop guy at these great below market rates and then see customers being informed that the owner used that that bank and thus choosing it. You don’t see lots of people choosing the bank because of sponsorships: they are marketing, yes, but not something that really moves the needle on civic pride very much anymore with any but the smallest banks. You bring your balances to that bank because you want a local bank with responsive customer service, or if they are better aware of local business conditions and better able to assess the risk of the projects they finance.
  - throw9away6 3y ago
    In the past local banks had better understand of local risk environment and could offer loans for things bigger banks would never touch (though Usally still at high rates). Now this really isn’t happening much so local banks are chasing the same commodity loans that the big guys chase and they just can’t compete. If banks don’t actually keep the loans they originate and everyone chases commoditized loans to sell off to investors there really is no use for local banks.
    - taeric 3y ago
e63f67dd-065b 3y ago
The story about sponsoring local businesses is nice, but really undersells how community banks drive economic activity: they finance a lot of property development. The sandwich shop is not getting a big business loan anyways, but often property developers are intimately tied to local banks in their financing. Commercial real estate (CRE) is deeply linked to small banks in a way that's hard to understand. They often are willing to lend at lower rates, are more flexible about financing structures, payment, etc. This is the kind of non-scalable business that the big banks don't really want to touch and is an important driver of CRE activity. I have a friend who develops hotels in NYC for example and even there, a stone's throw away from wall street and HQ of the largest banks on the planet, their financing is often much easier with a small community bank that have essentially specialised in NYC CRE lending.
- everybodyknows 3y ago
  This is the fundamental rationale for the local lending officer, neglected by Levine's piece: Someone who overhears gossip about local businesses -- at charity board meetings, little-league barbecues or the like -- can then make better guesses as to which borrowers are or are not good risks.
notShabu 3y ago
High rates are currently maintained via the reverse repo facility which allows you to park your money at the Fed with high interest. Usually only bank and other primary dealers can have an account at the Fed but the reverse repo facility allows money markets (and thus anyone) to basically passthrough to the Fed. Given the high interest yield offered and the fact that the Fed by definition cannot go bust, there is no reason to put your money at a small bank due to the risk and low reward.
debacle 3y ago
Banks in general love high rates. It's really hard to both justify keeping your money in the bank (vs other assets or just under the mattress) when interest rates are zero or near zero, and higher rates give them more wiggle room with buyers with good credit. The problem right now is that those small banks' balance sheets are being squeezed by the pace of raising interest rates.
- paulddraper 3y ago
  Correct. It's the rapid transition from low rates to high rates that hurts.
adam_arthur 3y ago
The duration of the bank's loan book dictates how susceptible the bank is to rate changes. If the bank holds everything in short duration T-Bills, then rate increases don't impact them negatively in any meaningful way. Of course, the whole premise of making money via banking is to get a spread over the risk free rate. Fixed rate debt actually creates all kinds of distortions throughout the economy. If banks held all floating rate debt, then rate increases also wouldn't matter (outside of increased credit risk) as the rate hikes get baked into the interest they accrue on the loan. Mortgages are another example of a fixed rate distortion. You can see how frozen the market is due to all of the fixed rate debt issued far below what a non-fed intervention market price would have been. In most countries mortgages are majority floating rate, which leads to better responsiveness of price to changing conditions. In the end it will trend back to equilibrium anyway, just takes longer.
londons_explore 3y ago
In the UK, small banks basically don't exist. The burden of regulation means it is impossible to run a 'mom and pop bank'. Bricks and mortar banks are slowly dying too - they're mostly used by the old, and as that generation dies, the young are preferring all-online app based banking services.
photochemsyn 3y ago
The Fed should be required to offer public savings accounts at the listed rate. Similarly, bank savings account rates should be tied directly to the Fed rate by law, not as a choice made by bankers: https://www.bankrate.com/banking/federal-reserve/federal-reserve-impact-on-savings-accounts/ https://www.bankrate.com/banking/federal-reserve/federal-res...
- lotsofpulp 3y ago
  Electronic payments and technology has obviated the need for banks in general. Most people just need an account that keeps track of their ins and outs, and there is no reason it could not be government operated. Of course, with a constitutional amendment that every person has a right to an electronic money account with the ability to send and receive money at all times, regardless of convictions or whatever. And the government is obligated to provide identity verification services.
  - orangepurple 3y ago
    What you fail to understand is that when the political winds change an ever increasing basis of activities will be deemed to be money laundering and illegal and you will have nowhere to turn to.
    - lotsofpulp 3y ago
      The government offering electronic money accounts does not mean they have to take away cash. It just takes out a middleman and removes an inefficiency. It also holds them accountable directly, rather than them having plausible deniability because they task middlemen with arbitrarily discriminating on their behalf, like they currently do when you are suspected of money laundering.
      - orangepurple 3y ago
        There will be endless shortages of coins and cash
      - 3y ago
engineer_22 3y ago
Article makes is sound like the banks are capitalized by deposits. But by my understanding this hasn't been the case for a long time? Don't they recapitalize by taking a loan from another (larger) bank? I.E. the Federal Reserve?
- ivalm 3y ago
  A lot of regional banks were capitalized by deposits, once SVB collapsed the fed opened additional opportunities for regional banks to be capitalized by the fed. In general, the fed acts as a lender of last resort and charges excess interest rates. First republic had a moment where bigger banks deposited ~$30B into it, but even that was a small percentage of their overall depositor base. As deposits continued to flee they had to rely more on the fed (and then failed).
- aorloff 3y ago
  Banks can borrow from the Fed but at current rates. Problem is that banks are in the business of borrowing at lower rates than they lend. But borrowing from the Fed is at like 5% now whereas most bank books average a return lower than that. They can access cash but at a cost that is the opposite of how a bank’s business should run
thriftwy 3y ago
It's weird that USA still has regional banks thriving. In Russia, it is Sberbank all the way down. Largest banks have unprecedented regional networks and perceived as vert safe so they can allow themself to pay shit rates on deposits and use it to give out mortgages. Principal business plan of regional banks is undercut. The only way how they may stay alive is to ally with large regional businesses to be used as their purse. Add to that is that modern bank is an IT company and a large bank may invest in much more sophisticated online services.
khuey 3y ago
What's missing from this IMO is any explanation of why 5% is the magic number that makes this possible. If the socially beneficial aspects of local banking are funded by the spread between what the bank pays its customers and the market rate of interest (in the Federal Funds Rate/the 4 week t-bill/money market fund yields/etc) why does the spread have to be so high? Why can't the bank pay its depositors 3% and do this stuff with a 2% spread? A 5% spread is the highest in at least 15 years and local banks seemed to be doing fine throughout much of that period.
zuminator 3y ago
The article extensively quotes a WSJ article that points outs that banks in the US have decreased from 8,000 in 2010 to under 4,700 today. But when you click through to that WSJ article [0], the included chart shows a fairly smooth decline during that period. In fact during that entire time up until a year ago, the Federal funds rate was 2.5% or less [1], which convincingly argues against the recent interest rate hikes being the primary cause of bank consolidations. [0] https://archive.ph/yPIqw https://archive.ph/yPIqw [1] https://www.forbes.com/advisor/investing/fed-funds-rate-history/ https://www.forbes.com/advisor/investing/fed-funds-rate-hist... (Furthermore from 1990 to 2008 the vast majority of the time the rate was well over 2.5%)
hnburnsy 3y ago
Here is an example of my smallish bank playing games in times of high rates. For customers they are offering a 182 day CD at 0.05%, while at the same time you can get a brokered CD for the same bank, 6 months at 5.3%.

51 points by feross 3y ago

https://archive.ph/xSRNU https://archive.ph/xSRNU

This sounds like a feel good historical take, not a recent change. And as the largest retail banks offer zero interest, it doesn’t quite mesh with that narrative.

lotsofpulp 3y ago
Technically, Chase offers 4.2% for FDIC insured savings accounts and BoA offers 4.76%. The caveat is you have to deposit $100k first (you can draw down and deposit more anytime after that and maintain the account even with just $1). https://www.jpmorgan.com/wealth-management/premium-deposit https://www.jpmorgan.com/wealth-management/premium-deposit https://olui2.fs.ml.com/Publish/Content/application/pdf/GWMOL/ICCRateSheet.pdf https://olui2.fs.ml.com/Publish/Content/application/pdf/GWMO...
- mint2 3y ago
  Interesting, that’s not typical product though
  - lotsofpulp 3y ago
    I would recommend these at 4.95% and 4.6%: https://www.cit.com/cit-bank/platinum-savings https://www.cit.com/cit-bank/platinum-savings https://www.cit.com/cit-bank/bank/savings/savings-connect-account https://www.cit.com/cit-bank/bank/savings/savings-connect-ac... CIT is a subsidiary of First Citizens, which is 19th on the list of US banks on Wikipedia.
wonnage 3y ago
> And as the largest retail banks offer zero interest, it doesn’t quite mesh with that narrative. The point is that large banks have a win-win right now - higher rates make it easier for them to make money, but the fact that people were spooked by regional bank failures means that they don't need to turn around and offer higher rates to attract deposits.

opportune 3y ago

The article is kind of all over the place. Anyway, to me bank consolidation is a relatively obvious outcome of digital banking + economies of scale + too big to fail. While it’s true local banks provide a public local benefit, they are IME just inefficient - tons of brick and mortar, overly reliant on upselling you on services that are frankly rip-off’s. The large physical and human presence basically means your ROI as a customer is capped due to poor unit margins. Another thing I really dislike about businesses at this scale is they are very often nepotistic. Where I’m from it’s very common for businesses to pass from generation to generation - your career is really capped if you’re not “in”. One of the nice things about huge corporations is that they’re a bit more merit-based in who they hire. Are small businesses cute and quaint, sure, but I don’t feel bad for them.

sclarisse 3y ago
I think the sponsorship story is particularly overrated. You don’t see small banks lending to the sandwich shop guy at these great below market rates and then see customers being informed that the owner used that that bank and thus choosing it. You don’t see lots of people choosing the bank because of sponsorships: they are marketing, yes, but not something that really moves the needle on civic pride very much anymore with any but the smallest banks. You bring your balances to that bank because you want a local bank with responsive customer service, or if they are better aware of local business conditions and better able to assess the risk of the projects they finance.
- throw9away6 3y ago
  In the past local banks had better understand of local risk environment and could offer loans for things bigger banks would never touch (though Usally still at high rates). Now this really isn’t happening much so local banks are chasing the same commodity loans that the big guys chase and they just can’t compete. If banks don’t actually keep the loans they originate and everyone chases commoditized loans to sell off to investors there really is no use for local banks.
  - taeric 3y ago

e63f67dd-065b 3y ago

The story about sponsoring local businesses is nice, but really undersells how community banks drive economic activity: they finance a lot of property development. The sandwich shop is not getting a big business loan anyways, but often property developers are intimately tied to local banks in their financing. Commercial real estate (CRE) is deeply linked to small banks in a way that's hard to understand. They often are willing to lend at lower rates, are more flexible about financing structures, payment, etc. This is the kind of non-scalable business that the big banks don't really want to touch and is an important driver of CRE activity. I have a friend who develops hotels in NYC for example and even there, a stone's throw away from wall street and HQ of the largest banks on the planet, their financing is often much easier with a small community bank that have essentially specialised in NYC CRE lending.

everybodyknows 3y ago
This is the fundamental rationale for the local lending officer, neglected by Levine's piece: Someone who overhears gossip about local businesses -- at charity board meetings, little-league barbecues or the like -- can then make better guesses as to which borrowers are or are not good risks.

notShabu 3y ago

High rates are currently maintained via the reverse repo facility which allows you to park your money at the Fed with high interest. Usually only bank and other primary dealers can have an account at the Fed but the reverse repo facility allows money markets (and thus anyone) to basically passthrough to the Fed. Given the high interest yield offered and the fact that the Fed by definition cannot go bust, there is no reason to put your money at a small bank due to the risk and low reward.

debacle 3y ago

Banks in general love high rates. It's really hard to both justify keeping your money in the bank (vs other assets or just under the mattress) when interest rates are zero or near zero, and higher rates give them more wiggle room with buyers with good credit. The problem right now is that those small banks' balance sheets are being squeezed by the pace of raising interest rates.

paulddraper 3y ago
Correct. It's the rapid transition from low rates to high rates that hurts.

adam_arthur 3y ago

The duration of the bank's loan book dictates how susceptible the bank is to rate changes. If the bank holds everything in short duration T-Bills, then rate increases don't impact them negatively in any meaningful way. Of course, the whole premise of making money via banking is to get a spread over the risk free rate. Fixed rate debt actually creates all kinds of distortions throughout the economy. If banks held all floating rate debt, then rate increases also wouldn't matter (outside of increased credit risk) as the rate hikes get baked into the interest they accrue on the loan. Mortgages are another example of a fixed rate distortion. You can see how frozen the market is due to all of the fixed rate debt issued far below what a non-fed intervention market price would have been. In most countries mortgages are majority floating rate, which leads to better responsiveness of price to changing conditions. In the end it will trend back to equilibrium anyway, just takes longer.

londons_explore 3y ago

In the UK, small banks basically don't exist. The burden of regulation means it is impossible to run a 'mom and pop bank'. Bricks and mortar banks are slowly dying too - they're mostly used by the old, and as that generation dies, the young are preferring all-online app based banking services.

photochemsyn 3y ago

The Fed should be required to offer public savings accounts at the listed rate. Similarly, bank savings account rates should be tied directly to the Fed rate by law, not as a choice made by bankers: https://www.bankrate.com/banking/federal-reserve/federal-reserve-impact-on-savings-accounts/ https://www.bankrate.com/banking/federal-reserve/federal-res...

lotsofpulp 3y ago
Electronic payments and technology has obviated the need for banks in general. Most people just need an account that keeps track of their ins and outs, and there is no reason it could not be government operated. Of course, with a constitutional amendment that every person has a right to an electronic money account with the ability to send and receive money at all times, regardless of convictions or whatever. And the government is obligated to provide identity verification services.
- orangepurple 3y ago
  What you fail to understand is that when the political winds change an ever increasing basis of activities will be deemed to be money laundering and illegal and you will have nowhere to turn to.
  - lotsofpulp 3y ago
    The government offering electronic money accounts does not mean they have to take away cash. It just takes out a middleman and removes an inefficiency. It also holds them accountable directly, rather than them having plausible deniability because they task middlemen with arbitrarily discriminating on their behalf, like they currently do when you are suspected of money laundering.
    - orangepurple 3y ago
      There will be endless shortages of coins and cash
    - 3y ago

engineer_22 3y ago

Article makes is sound like the banks are capitalized by deposits. But by my understanding this hasn't been the case for a long time? Don't they recapitalize by taking a loan from another (larger) bank? I.E. the Federal Reserve?

ivalm 3y ago
A lot of regional banks were capitalized by deposits, once SVB collapsed the fed opened additional opportunities for regional banks to be capitalized by the fed. In general, the fed acts as a lender of last resort and charges excess interest rates. First republic had a moment where bigger banks deposited ~$30B into it, but even that was a small percentage of their overall depositor base. As deposits continued to flee they had to rely more on the fed (and then failed).
aorloff 3y ago
Banks can borrow from the Fed but at current rates. Problem is that banks are in the business of borrowing at lower rates than they lend. But borrowing from the Fed is at like 5% now whereas most bank books average a return lower than that. They can access cash but at a cost that is the opposite of how a bank’s business should run

thriftwy 3y ago

It's weird that USA still has regional banks thriving. In Russia, it is Sberbank all the way down. Largest banks have unprecedented regional networks and perceived as vert safe so they can allow themself to pay shit rates on deposits and use it to give out mortgages. Principal business plan of regional banks is undercut. The only way how they may stay alive is to ally with large regional businesses to be used as their purse. Add to that is that modern bank is an IT company and a large bank may invest in much more sophisticated online services.

khuey 3y ago

What's missing from this IMO is any explanation of why 5% is the magic number that makes this possible. If the socially beneficial aspects of local banking are funded by the spread between what the bank pays its customers and the market rate of interest (in the Federal Funds Rate/the 4 week t-bill/money market fund yields/etc) why does the spread have to be so high? Why can't the bank pay its depositors 3% and do this stuff with a 2% spread? A 5% spread is the highest in at least 15 years and local banks seemed to be doing fine throughout much of that period.

zuminator 3y ago

The article extensively quotes a WSJ article that points outs that banks in the US have decreased from 8,000 in 2010 to under 4,700 today. But when you click through to that WSJ article [0], the included chart shows a fairly smooth decline during that period. In fact during that entire time up until a year ago, the Federal funds rate was 2.5% or less [1], which convincingly argues against the recent interest rate hikes being the primary cause of bank consolidations. [0] https://archive.ph/yPIqw https://archive.ph/yPIqw [1] https://www.forbes.com/advisor/investing/fed-funds-rate-history/ https://www.forbes.com/advisor/investing/fed-funds-rate-hist... (Furthermore from 1990 to 2008 the vast majority of the time the rate was well over 2.5%)

hnburnsy 3y ago

Here is an example of my smallish bank playing games in times of high rates. For customers they are offering a 182 day CD at 0.05%, while at the same time you can get a brokered CD for the same bank, 6 months at 5.3%.