04/04/2023
Banking crisis and Its Lasting Effects!
The near-0% interest rates for past 14 years on interest rate suppression from Federal Reserve is playing hard on bank deposits, and bank customers are moving large sums of money around, as deposits can give good returns now, forcing banks to respond by offering better deals. Banks are now offering 5%-plus on CDs, and people are moving huge sums from some banks into other banks, from money-market accounts to CDs, from checking and savings accounts to CDs, money market accounts, etc., and to treasury securities. Since past year we had been recommending buying treasury securities and iBonds earlier for very low risk returns.
Banks have to offer good interest rates to keep the deposits. The question bank customers are asking themselves - is it worth to keep money in the bank when there are very low risk treasury securities and CDs available? These higher deposit rates mean the banks’ costs of funding are rising, and their margins are getting squeezed. The average rates across all deposits in the banks across the nation are still near-0 that is 0.5%. CD rates on average across the nation are 1.5% much better than last year which were below 1%. Banks profit margins are getting squeezed, a couple of them have collapsed - yes including the famous silicon valley bank because they got caught in the rising rates environment while they had huge amounts of long term treasury securities and mortgage back securities that these banks bought at a time when interest rates were very low. If we do the math, until the banks offer lucrative interest the deposits outflows from the bank will continue. Now the question is how long it will continue and what effects we will see from these deposit outflows. Stay tuned! next episode is still brewing…
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