
Banks are slow to increase rates on savings accounts, but quick to reduce them - jpkoning
http://jpkoning.blogspot.com/2020/06/banks-are-slow-to-increase-rates-on.html
======
mabbo
The problem is that most people don't want to change banks.

If changing your bank to get a better savings rate took 15 minutes and had no
other consequences, banks would be updating their rates by the second to beat
one another. But it doesn't. If your mortgage, credit cards, car loan, etc,
are all with the same bank then switching your bank account only just to get
0.1% higher interest is a huge hassle for little benefit. Especially if you
don't have much money sitting in a savings account- even with $5000 in your
account, a 0.1% difference is $5/year.

So what banks are actually competing over is the people who happen to be
shopping around for a new bank- something most people do only a handful of
times in their life. Meanwhile, leaving rates low improves the banks bottom
line. Short term vs long term tradeoffs.

In short: banks have little reason to raise savings account interest rates
regardless of what their central bank gives them.

~~~
thaumasiotes
> So what banks are actually competing over is the people who happen to be
> shopping around for a new bank- something most people do only a handful of
> times in their life.

It's worse than that. I shopped around for a new bank based on my needs -- I
picked Capital One specifically because of their advertised "no foreign
transaction fees". [In fact, there's a fee around 1%, it's just not called a
"foreign transaction fee". But 1% is low enough for me.] Interest on savings
accounts didn't register at all.

And really, interest on savings accounts _shouldn 't_ register for anyone
looking for a bank account, because savings accounts are a terrible, terrible
way to invest your money. If you have money in a savings account _for the
purpose of earning interest_ , you're doing it wrong.

~~~
jbay808
> savings accounts are a terrible, terrible way to invest your money. If you
> have money in a savings account for the purpose of earning interest, you're
> doing it wrong.

Note that this wasn't always the case, though. Until not too long ago, keeping
your money in a savings account, not making too many "risky" investments, and
benefiting from compound interest in the long term while saving for retirement
was considered basic financial literacy.

However, by now interest rates have been near zero and well below inflation
for the entire adult lives of anyone under ~35, so the common wisdom has
shifted to investing your money in the market being basic financial literacy.

~~~
thaumasiotes
> However, by now interest rates have been near zero and well below inflation
> for the entire adult lives of anyone under ~35

When were interest rates on bank accounts not below inflation? Bank interest
failing to even keep up with inflation is not a recent phenomenon; as far as
I'm aware, our low rates now are better, inflation-adjusted, than the old high
rates were.

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save_ferris
This seems like pretty typical market behavior to me. Are we really surprised
that banks are taking the opportunity to increase their profits by choosing
not to pass down all savings to customers?

The same exact thing happens with gas stations. The price of gas never falls
quite as fast or far for the consumer as it does for the retailer, but gas
stations will instantly respond to price increases. I’m sure there are dozens
of other examples of this.

~~~
leetrout
I heard this story / explanation before:

You own a gas station and you want to fill up your tanks so you call the
distributor and pay $1 / gallon. You then sell that for $1.10 / gallon making
a 10% profit.

Now prices of crude doubles and you have 1000 gallons left to sell. It’s going
to cost you $2 / gal to refill so you immediately raise your price to prevent
a loss and cover the next fill.

I don’t know how accurate that is to the real situation gas stations face but
I’d never thought of it in terms of selling higher to afford the next bulk
delivery.

~~~
bryanlarsen
But when the price drops back down you don't immediately drop your price
because why would you charge $1.10 for something you paid $2 for?

But your competitor will lower their prices when they get a refill, so you may
end up having to lower your prices before you get your own refill.

~~~
leetrout
Yep, correct.

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formercoder
Online only banks offer great rates on savings accounts. The Fed has an
influence but these rates are market driven. If you want high rates, look for
them and put your money there. Many financial products are only available to
the wealthy but in this case anyone can do this.

~~~
garmaine
Savings account rates are terrible compared with alternative investments
though, even cash-storage investments.

~~~
formercoder
I’m not aware of anything with that risk / liquidity profile which pays
better? In fact theoretically there shouldn’t be anything.

~~~
throwaheyy
\- High yield savings accounts

\- CDs

\- Money market accounts

All pay much higher than a typical megabank savings account and are equally as
safe.

~~~
formercoder
Sorry i meant better than high yield savings.

~~~
throwaheyy
Bond ETFs are right now around 2% yield with slightly higher risk than a
savings account

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thrwn_frthr_awy
This is why the stock market is still going up. There is no where else to put
your money. We need better 1-3% returns for savings and 401ks outside of
equities. Where are people supposed to put their money these days?

~~~
missedthecue
You're not supposed to keep your money anyway. That's literally the whole
point. Rates are so low because they're trying to get you to spend.

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jacquesm
Same with fuel prices. War in the middle East? Gas prices jump up overnight.
Slump or excess? Consumer prices drop ridiculously slow. Middle men will
always use any excuse to extract more from both sides.

~~~
uxp100
I guess that’s true in most cases, a lot of people seem to be saying it, but a
few months ago we had gas cheaper than $1 per gallon quite suddenly.

~~~
comicjk
This makes sense when you think about the inelastic demand for gas and the
physical problem of storing it. The availability of storage makes gas prices
change slowly most of the time. But, if there's a chance of the tanks running
dry, prices go sharply up. And if there's a chance of the tanks running out of
space, prices go sharply down.

~~~
wolco
In those cases they shouldn't go up immediately only during refilling an
order.

~~~
comicjk
Not the individual gas stations; I mean the storage capacity of the whole
system.

------
PaulDavisThe1st
Another (small) dimension to this: my brother-in-law works for an organization
that acts as a thinktank for many/most(all?) credit unions in the US. When we
moved to Santa Fe last year, I noted that the credit union I wanted to join
(yay! credit unions!) offered an insanely low interest rate for their savings
account. So I asked my BiL whether I should feel guilty about using an online
"high rate" savings account instead.

He told me that if a CU is offering a very low rate, it essentially means that
they don't have much significant lending going on. He said that if things
changed, and they start to see real growth in the demand for capital loans,
their savings interest rate will pick up. He said I should not worry about it.

Now, this doesn't really address the Fed rate vs. the savings interest rate
gap (surely the CU could at least pay something near the Fed rate), but it did
expand my understanding of the situation for credit unions, at least.

~~~
missedthecue
Customers that jump around for an extra basis point in interest on their $400
account are the worst customers for a bank. There is a sweet point that banks
and credit unions try to hit where they aren't competing for those customers
but that they're getting enough deposits to operate and grow.

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jdeibele
Both my mom and my aunt died a couple of years ago. I had all the paperwork
that I needed but it was 2-3 hours for each account that needed to be closed
and a new account opened for the estate. I was able to close one of my mom's
and that was relatively easy, like 15 minutes.

It did seem incredibly expensive to provide a person to interact with. One of
the banks involved was Chase and they did have a video interface where you
could interact with a banker somewhere else.

I guess it works out, since the banks had thousands of dollars sitting in the
bank paying no interest. And the amounts surged to hundreds of thousands as
their houses were sold and before the money was distributed to the heirs.

But dealing with the general public for accounts in the hundreds of dollars
has to be a money loser. Except for the overdraft and other fees, of course.

------
blantonl
Same goes for gas prices. I heard an earnings call recently for a public
company that runs a ton of gas stations. They indicated that their margins on
gasoline have gone far far up and offsetted and losses of sales of
drink/snacks etc in their stores, because they are quick to raise gas prices
when oil prices go up, but very slow to do so when prices go down.

The amount of fascinating economic lessons we've gotten over the past 6 months
is amazing. All kinds of cool things I've learned:

Pool companies are backed up 1 year right now with people nesting at home

Whirlpool blew their analysts earnings estimates out of the water on strong
appliance sales due to "nesting at home"

Weber grills are on huge back order.

and on and on.

~~~
jacquesm
> losses of sales of drink/snacks etc in their stores

As a former gas station owner, let me correct you here. Drinks and snacks, no
matter how low the volume have crazy margins, sometimes 100% or more and make
up a large fraction of gas station profits. It isn't rare to run the fuel at a
loss to sell more ice cream and drinks.

~~~
jon-wood
How can a product have > 100% margin? Were you getting paid by the supplier to
stock their products?

~~~
gambiting
Uhm, you buy an item for $1, sell it for $3, the margin is 200%, no?

~~~
sokoloff
As typically defined: The _margin_ is 67%. The _markup_ is 200%.

Margin is "profit as percent of revenue". Markup is "profit as percent of
COGS".

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wdb
The problem is that the banks can borrow so cheaply that they actually don't
want to pay their clients the interest rates on their accounts. As it
expensive for the bank, and increases the bank's liabilities/risks (money in
the books) hence they will lower the rates. Which then hopefully will lower
the amounts on the books by people either moving it out of the bank or spend
it.

That's what I understood from the bankers when I was working at a bank :) They
a had a simple formula representing but can't find my notes now.

I am 'enjoying' interest rates on my bank accounts around the world between
-0.5%-1.5%. I really should sort out the negative rent.

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chrisseaton
But nobody is expecting to be earning a significant return from a retail bank
account, are they?

I think if you're disappointed by your checking-account interest rate you
probably first need to think about why you're storing your money there.

~~~
rjkennedy98
There are a lot more people than you think that simply don't invest their
money, instead they keep it in savings accounts. My aunt is one of those
people. She got a large inheritance and basically kept it in a savings account
for 20 years. My mom got the same inheritance and bought investment properties
with it and now its worth 10x. I think it comes down to the fact that a lot of
people are risk averse or feel that investments are too complicated for them.

~~~
stagger87
10x? I'm not familiar with real estate. How does one earn 10x in that time
frame. Even with a price to rent ratio of 1 to 15 and assuming housing prices
double over that period, you still aren't at 10x, and that doesn't include
maintenance, taxes, closing fees, etc.

~~~
readams
Leverage. Let's say the inheritance was 50k. You make that a 10% down payment
on a 500k house. Assume rent covers your interest on the loan, taxes, etc. 10
years later the house appreciates 100% to 1M. You sell the house.

You just made 500k from 50k.

~~~
perl4ever
Did you mean "etc" to include maintenance, principle payments, and transaction
costs?

It doesn't sound like you're describing the magic of leverage, but the magic
of having an arbitrary amount of cashflow.

Makes me think of
[https://en.wikipedia.org/wiki/Robert_Kiyosaki](https://en.wikipedia.org/wiki/Robert_Kiyosaki)
and
[https://en.wikipedia.org/wiki/Trump_University](https://en.wikipedia.org/wiki/Trump_University)

------
fendy3002
The worse thing is that the opposite applies for floating credit (loan) rate.
They're very quick to increase the rates but very very slow to reduce them. So
it's like double profit for them.

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larrydag
The banks cost of money isn't closely tied to the Fed rate. It is more tied to
long term investments such as government bonds or t-bills. These have been
pretty low and very low recently.

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fallingfrog
I think a lot of the issue is that the model of banking has changed. Once upon
a time, the business model was that the customer deposits savings, then the
bank loans out that money, and the interest they collect is the profit.

But with unlimited free money from the fed, why bother? The fact is that they
don’t actually want your money any more. It’s just a hassle to keep track of.
They get a lot more money by charging overdraft fees than by loaning your
money out anyway. So why should they be eager to compete for savings deposits?

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ricardo81
From my limited experience, they're good at offering an enticing savings rate
but a year or two later will whack it down close to nil. They're playing the
same game as utilities and insurance, after a year or two your benefits shrink
or your costs go up.

Examples, had a 2% interest rate "ISA"-like account and it went down to 0.01%.
Home insurance doubles in 10 years through lack of changing it.

Switching all our services yearly is a time suck and they know it.

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mc32
Reminds me of gas stations, quick to jack up the prices, slow to reduce them.

If you hold inventory, it’s hard to resist unless market pressure forces
different pricing.

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hamilyon2
Biggest assymetry I noticed yet is that mortgage rates are often fixed no
matter what happens to current money lending rate.

I am no financial expert, but I think unpredictable rates hugely favor
consumer.

When rates are high and money is in high supply, inflation reduces the actual
principal, as nominal amount Stas the same. When rates are low, you can
refinance mortgage at current, low rates and reduce interest part of your
mortgage.

~~~
lotsofpulp
The US government subsidizes the home mortgage market in the US. I don’t known
of any other country offers people 30 year fixed rate mortgages.

Fixed mortgage rates help consumers because they can always refinance down to
a lower rate.

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dhosek
My credit union is really good about tracking rates against the greater
market. But I only qualified for membership because I taught community college
in Orange County, California for two semesters as an adjunct. I live in
Chicago now and I have no intention of giving up my account with that credit
union.

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cm2187
I am happy to be contradicted by better specialists than me of US banks. But
aren’t the vast majority of loans in the US fixed rate with no or little
prepayment penalties? If that’s the case the interest rate risk of these banks
is not trivial and certainly not a simple pass-through of overnight rates.

~~~
tssva
The article isn't about loan interest rates but the interest rate banks offer
on deposits.

~~~
cm2187
Where do you think the bank gets the money for paying interest on deposits
from?

~~~
dsr_
They have sofas in their lobby, and they look under the cushions.

I just checked. US Bank's basic savings account offer 0.01% APY and costs
$4/month.

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singhrac
As an aside, if someone is fairly risk averse (i.e. doesn't want to lose more
then 10-15% in a crisis like what just happened) and wants to park ~200k, is
the best option a high-yield savings account? A CD? I would have normally
thought treasuries but obviously interest rates are low.

~~~
reducesuffering
Depends on if you mean 10-15% real purchasing power or nominal. Most people
think of cash as safe as possible but heavy inflation could wipe out 50% real
purchasing power in a few years. Nominal? Sure, high yield savings account is
safest, 1% currently, and won’t lose any nominal. You could even do a bond or
muni bond fund, BND or VTEB, to gain extra after-tax yield ~2% without losing
more than 10-15%. But you really want to not lose more than 10-15% real, in
which you’d need to think of the money as a portfolio including inflation
hedges like TIPS (inflation protected bonds), Stocks, and Gold, albeit in
small 5-10% allocations because of their greater risk.

~~~
mrep
I like BND. Only dropped 8.7% from peak to bottom in march (back up now), it
pays out a decent dividend, and it is a vanguard etf and vanguard is awesome
in my experience.

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tomhoward
patio11 tweeted about banks and their opaque conduct re. interest on savings
accounts in the past couple of months:

[https://twitter.com/patio11/status/1269919425802559488](https://twitter.com/patio11/status/1269919425802559488)

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neilwilson
Banks will pay as little as they can get away with and charge as much as they
can get away with.

Only competition stops that being nothing and loads.

There is no “passing on”. There is only what the market forces on a bank to
survive.

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LatteLazy
If you can borrow from your central bank for nothing, why would pay depositors
anything? They're not just competing with free, they're unreliable and
expensive to manage.

------
danielfoster
Internet is only a small part of the equation here. Banks are constantly
giving back to customers in other ways, such as free checks, ATM fee refunds,
and sign-up bonuses.

------
known
Wish algorithms decide [https://banksdaily.com/central-
banks/](https://banksdaily.com/central-banks/)

------
vinni2
Why is it surprising? It applies to housing loans as well. Sometimes unless
you threaten the banks that you will switch the bank they won’t reduce it
interest rate.

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jennyyang
This is the same with gasoline prices too. CA gas prices are still well over
$3/gallon despite low crude prices.

~~~
lotsofpulp
That’s just how much refining fuel costs. There is no monopoly of fuel
suppliers holding the gas price up, and gas stations make very little money
selling gas itself.

~~~
ac29
Refining isnt actually all that expensive. At least in California, taxes are a
higher percentage of total price (18.4c federal + 35c state, per gallon).

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TallGuyShort
There's another asymmetry where people like to buy stocks at a low price and
sell them at a high price.

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pjfin123
Ally bank (an online bank) has very competitive savings rates and great online
banking/support.

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cjbenedikt
Just like gas/petrol stations when it comes to oil price changes...

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ohmybash
Banks exist to make money. I don't understand how this is surprising to
anyone. Downvote me all you want, but it's mind-boggling that a private
message board for startups is also full of surprised Pikachu faces any time a
company tries to turn a profit.

------
aronpye
Why would you ever have a savings account? They’re pointless as they always
earn little interest. Much better to invest in an ETF that tracks something
like the S&P500 with an average year on year growth of 10%, or if that is too
risky invest in a government bond.

~~~
repsilat
> _or if that is too risky invest in a government bond._

You can get 1% in a savings account in the US. TBill rates are all less than
0.25%. The latter has tax benefits, but not enough.

One good way to "get a higher return" (for some at least) is to pay down debt.
If your mortgage is at 3%, whatever you pay off is "earning" 2ish% after tax.
If your margin loan is at 1.5%, anything you pay off earns 1.5% (because the
interest isn't deductible.)

~~~
aronpye
One of the things I do is use interest free credit cards to pay for my usual
expenses such as food and fuel. That frees up cash. I then use that cash to
invest in ETFs. When the interest free period on the credit card expires I
either sell the ETFs to pay it off or use an interest free balance transfer
card to carry the debt. In that case, as long as the transfer fee is below
your rate of return + inflation you profit.

~~~
aronpye
You then pocket the net return on investment from the ETFs. The risk
mitigation is that the interest free period is usually over 2 years, enough
time for a stock market recovery should a downturn happen and you fail to time
to market and sell on a high.

------
JackFr
The ease with which money can be moved in and out of money market funds mean
that it’s probably unlikely that anyone has a long term balance of over $2000
or so in a savings account. At those levels the difference in interest rates
is dwarfed by fees etc.

------
m3kw9
Same with gas prices

------
golemotron
It's almost like banking is a business.

------
ycombonator
Just like gas station prices.

------
voisin
Title sounds like the Fed.

------
diogenescynic
Same with gas prices.

------
ArtWomb
Am curious how Compound, dX/dY, Nexo services are able to advertise such high
interest rates on digital assets. Some as high as 10% APR accrued on a daily
basis.

~~~
ac29
For one, because the underlying asset they are paying interest in can lose
value, or even go to zero. Compound, for example, has lost 50% of its value in
just a month.

The crypto space is also, to say the least, extremely risky, and full of every
variety of untrustworthy, unscrupulous character.

