tag:theconversation.com,2011:/us/topics/bank-deposits-134432/articlesbank deposits – The Conversation2023-03-13T20:42:52Ztag:theconversation.com,2011:article/2017372023-03-13T20:42:52Z2023-03-13T20:42:52ZWhy SVB and Signature Bank failed so fast – and the US banking crisis isn’t over yet<figure><img src="https://images.theconversation.com/files/514960/original/file-20230313-28-eija0m.jpg?ixlib=rb-1.1.0&rect=36%2C61%2C8142%2C5395&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Signature Bank collapsed at lightning speed. </span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/SiliconValleyBank/6068a34a1c7b417b9d41a5bda2bd2f51/photo?Query=signature%20bank&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=121&currentItemNo=3">AP Photo/Yuki Iwamura</a></span></figcaption></figure><p><a href="https://theconversation.com/silicon-valley-bank-biggest-us-lender-to-fail-since-2008-financial-crisis-a-finance-expert-explains-the-impact-201626">Silicon Valley Bank</a> and <a href="https://www.nytimes.com/2023/03/12/business/signature-bank-collapse.html">Signature Bank</a> failed with enormous speed – so quickly that they could be textbook cases of classic bank runs, in which too many depositors withdraw their funds from a bank at the same time. The failures at SVB and Signature were <a href="https://www.reuters.com/business/finance/new-york-state-regulators-close-signature-bank-2023-03-12/">two of the three biggest</a> in U.S. banking history, following the collapse of Washington Mutual in 2008. </p>
<p>How could this happen when the banking industry has been sitting on record levels of <a href="https://fred.stlouisfed.org/series/TOTRESNS">excess reserves</a> – or the amount of cash held beyond what regulators require?</p>
<p>While the most common type of risk faced by a commercial bank is <a href="https://www.thebalancemoney.com/washington-mutual-how-wamu-went-bankrupt-3305620">a jump in loan defaults</a> – known as credit risk – that’s not what is happening here. As an <a href="https://scholar.google.com/citations?user=jxC8cesAAAAJ&hl=en&oi=ao">economist who has expertise in banking</a>, I believe it boils down to <a href="https://www.occ.treas.gov/news-issuances/news-releases/1996/nr-occ-1996-2a.pdf">two other big risks</a> every lender faces: interest rate risk and liquidity risk.</p>
<h2>Interest rate risk</h2>
<p>A bank faces <a href="https://corporatefinanceinstitute.com/resources/risk-management/interest-rate-risk/">interest rate risk</a> when the rates increase rapidly within a shorter period. </p>
<p>That’s exactly what has happened in the U.S. since March 2022. The Federal Reserve has been aggressively raising rates – <a href="https://www.federalreserve.gov/monetarypolicy/openmarket.htm">4.5 percentage points so far</a> – in a bid to tame soaring inflation. As a result, the yield on debt has jumped at a commensurate rate. </p>
<p>The yield on one-year U.S. government Treasury notes <a href="https://www.cnbc.com/quotes/US1Y">hit a 17-year high of 5.25% in March 2023</a>, up from less than 0.5% at the beginning of 2022. Yields on 30-year Treasurys <a href="https://fred.stlouisfed.org/series/DGS30">have climbed almost 2 percentage points</a>.</p>
<p>As yields on a security go up, its price goes down. And so such a rapid rise in rates in so short a time caused the market value of previously issued debt – whether corporate bonds or government Treasury bills – to plunge, especially for longer-dated debt. </p>
<p>For example, a 2 percentage point gain in a 30-year bond’s yield can cause its market value to <a href="https://www.wsj.com/market-data/bonds/treasuries">plunge by around 32%</a>.</p>
<p>SVB, as Silicon Valley Bank is known, had a massive share of its assets – 55% – <a href="https://s201.q4cdn.com/589201576/files/doc_downloads/2023/03/Q1-2023-Mid-Quarter-Update-vFINAL3-030823.pdf">invested in fixed-income securities</a>, such as U.S. government bonds. </p>
<p>Of course, interest rate risk leading to a drop in market value of a security is not a huge problem as long as the owner can hold onto it until maturity, at which point it can collect its original face value without realizing any loss. The unrealized loss stays hidden on the bank’s balance sheet and disappears over time.</p>
<p>But if the owner has to sell the security before its maturity at a time when the market value is lower than face value, the unrealized loss becomes an actual loss.</p>
<p><a href="https://insights.som.yale.edu/insights/is-the-collapse-of-svb-the-start-of-banking-panic">That’s exactly what SVB had</a> to do earlier this year as its customers, dealing with their own cash shortfalls, began withdrawing their deposits – while even higher interest rates were expected. </p>
<p>This bring us to liquidity risk.</p>
<h2>Liquidity risk</h2>
<p><a href="https://www.sas.com/en_us/insights/risk-management/liquidity-risk.html">Liquidity risk</a> is the risk that a bank won’t be able to meet its obligations when they come due without incurring losses.</p>
<p>For example, if you spend US$150,000 of your savings to buy a house and down the road you need some or all of that money to deal with another emergency, you’re experiencing a consequence of liquidity risk. A large chunk of your money is now tied up in the house, which is not easily exchangeable for cash. </p>
<p><a href="https://www.nytimes.com/2023/03/10/business/svb-silicon-valley-bank-explainer.html">Customers of SVB were withdrawing</a> their deposits beyond what it could pay using its cash reserves, and so to help meet its obligations <a href="https://s201.q4cdn.com/589201576/files/doc_downloads/2023/03/Q1-2023-Mid-Quarter-Update-vFINAL3-030823.pdf">the bank decided to sell</a> $21 billion of its securities portfolio at a loss of $1.8 billion. The drain on equity capital led the lender to try to <a href="https://www.axios.com/2023/03/09/silicon-valley-bank-launches-new-share-sale">raise over $2 billion</a> in new capital.</p>
<p>The call to raise equity <a href="https://www.reuters.com/business/finance/silicon-valley-bank-sell-stock-cope-with-cash-burn-2023-03-09/">sent shockwaves</a> to SVB’s customers, who were losing confidence in the bank and rushed to withdraw cash. A bank run like this can cause <a href="https://www.investopedia.com/terms/b/bankrun.asp">even a healthy bank to go bankrupt</a> in a matter days, especially now in the digital age. </p>
<p>In part this is because many of SVB’s <a href="https://www.ft.com/content/3c6551ff-9778-4713-afc5-f87ba0bb80dd">customers had deposits well above</a> the $250,000 insured by the Federal Deposit Insurance Corp. – and so they knew their money might not be safe if the bank were to fail. Roughly <a href="https://www.businessinsider.com/signature-svb-us-banks-have-over-1-trillion-uninsured-deposits-2023-3">88% of deposits</a> at SVB were uninsured. </p>
<p>Signature faced a similar problem, as SVB’s collapse <a href="https://www.nytimes.com/2023/03/12/business/signature-bank-collapse.html">prompted many of its customers</a> to withdraw their deposits out of a similar concern over liquidity risk. About 90% of its deposits were uninsured.</p>
<h2>Systemic risk?</h2>
<p>All banks face interest rate risk today on some of their holdings because of the Fed’s rate-hiking campaign.</p>
<p>This has resulted in <a href="https://www.fdic.gov/news/speeches/2023/spmar0623.html">$620 billion in unrealized losses</a> on bank balance sheets as of December 2022.</p>
<p>But most banks are unlikely to have significant liquidity risk.</p>
<p>While SVB and Signature <a href="https://ir.svb.com/financials/annual-reports-and-proxies/default.aspx">were complying with regulatory requirements</a>, the composition of their assets was not in line with industry averages. </p>
<p>Signature had <a href="https://www.wsj.com/market-data/quotes/SBNY/financials/annual/balance-sheet">just over 5% of its assets in cash</a> and SVB had 7%, compared with the <a href="https://www.federalreserve.gov/releases/h8/current/default.htm">industry average of 13%</a>. In addition, SVB’s 55% of assets in fixed-income securities compares with the <a href="https://www.federalreserve.gov/releases/h8/current/default.htm">industry average of 24%</a>. </p>
<p>The <a href="https://www.washingtonpost.com/business/2023/03/13/what-the-us-is-doing-to-avert-a-bank-crisis-and-why-quicktake/0d5f9752-c16c-11ed-82a7-6a87555c1878_story.html">U.S. government’s decision to backstop</a> all deposits of SVB and Signature regardless of their size should make it less likely that banks with less cash and more securities on their books will face a liquidity shortfall because of massive withdrawals driven by sudden panic. </p>
<p>However, with <a href="https://www.businessinsider.com/signature-svb-us-banks-have-over-1-trillion-uninsured-deposits-2023-3">over $1 trillion of bank deposits</a> currently uninsured, I believe that the banking crisis is far from over.</p><img src="https://counter.theconversation.com/content/201737/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Vidhura S. Tennekoon does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Lenders face a lot of risks, but two of them – interest rate and liquidity – were the main drivers of the sudden and rapid failure of Silicon Valley Bank and Signature Bank. That’s why more trouble may be ahead for the banking sector.Vidhura S. Tennekoon, Assistant Professor of Economics, Indiana UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2016262023-03-11T00:09:29Z2023-03-11T00:09:29ZSilicon Valley Bank biggest US lender to fail since 2008 financial crisis – a finance expert explains the impact<figure><img src="https://images.theconversation.com/files/514761/original/file-20230310-2469-mth9ci.jpg?ixlib=rb-1.1.0&rect=4%2C14%2C3275%2C2168&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">SVB encountered a perfect storm of high interest rates and fearful clients. </span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/BanksInflation/a1dcd3d738b4472c8205afbc50aa815c/photo?Query=Silicon%20Valley%20bank&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=38&currentItemNo=20">AP Photo/Jeff Chiu</a></span></figcaption></figure><p><em>Silicon Valley Bank, which catered to the tech industry for three decades, <a href="https://www.bloomberg.com/news/articles/2023-03-10/silicon-valley-bank-collapses-enters-fdic-receivership?srnd=premium&sref=Hjm5biAW">collapsed on March 10, 2023</a>, after the Santa Clara, California-based lender suffered from an old-fashioned bank run. State regulators seized the bank and <a href="https://www.fdic.gov/news/press-releases/2023/pr23016.html">made the Federal Deposit Insurance Corporation its receiver</a>.</em></p>
<p><em>SVB, as it’s known, was the <a href="https://www.cnbc.com/2023/03/10/silicon-valley-bank-is-shut-down-by-regulators-fdic-to-protect-insured-deposits.html">biggest U.S. lender</a> to fail since the 2008 global financial crisis – and the <a href="https://www.wsj.com/livecoverage/stock-market-news-today-03-10-2023/card/these-are-the-10-biggest-bank-failures-by-assets-pcLTXpSwlRgWLJM0RZXj">second-biggest ever</a>.</em></p>
<p><em>We asked <a href="https://scholar.google.com/citations?user=eP0xZ1kAAAAJ&hl=en&oi=ao">William Chittenden</a>, associate professor of finance at Texas State University, to explain what happened and whether Americans should be worried about the safety of their financial system.</em></p>
<h2>Why did Silicon Valley Bank collapse so suddenly?</h2>
<p>The short answer is that SVB did not have enough cash to pay depositors so the regulators closed the bank. </p>
<p>The longer answer begins during in the pandemic, when SVB and many other banks were <a href="https://www.wsj.com/articles/silicon-valley-bank-crisis-unsettles-bank-investors-bc4ee834?mod=article_inline">raking in more deposits</a> than they could lend out to borrowers. In 2021, <a href="https://www.wsj.com/livecoverage/stock-market-news-today-03-10-2023/card/what-silicon-valley-bank-and-silvergate-have-in-common-rcvKr06ursDTRXA6mPtv">deposits at SVB doubled</a>.</p>
<p>But they had to do something with all that money. So, what they could not lend out, they invested in ultra-safe U.S. Treasury securities. The problem is the <a href="https://theconversation.com/why-the-fed-raised-interest-rates-by-the-smallest-amount-since-it-began-its-epic-inflation-fight-199057">rapid increase in interest rates</a> in 2022 and 2023 caused the value of these securities to plunge. A characteristic of bonds and similar securities is that when yields or interest rates go up, prices go down, and vice versa.</p>
<p>The <a href="https://s201.q4cdn.com/589201576/files/doc_downloads/2023/03/Q1-2023-Mid-Quarter-Update-vFINAL3-030823.pdf">bank recently said</a> it took a US$1.8 billion hit on the sale of some of those securities and they were unable to raise capital to offset the loss as their stock began dropping. That prompted prominent venture capital firms to advise the companies they invest in to <a href="https://www.bloomberg.com/news/articles/2023-03-09/svb-ceo-becker-asks-silicon-valley-bank-clients-to-stay-calm?sref=Hjm5biAW">pull their business from Silicon Valley Bank</a>. This had a snowball effect that led a growing number of SVB depositors to withdraw their money too.</p>
<p>The investment losses, coupled with the withdrawals, were so large that regulators had no choice but to step in to shut the bank down to protect depositors. </p>
<h2>Are the deposits now safe?</h2>
<p>From a practical perspective, the FDIC is now running the bank. </p>
<p>It is typical for the FDIC to shut a bank down on a Friday and have the bank reopen the following Monday. In this case, the FDIC has already announced that the bank will reopen on March 13 as the <a href="https://www.fdic.gov/news/press-releases/2023/pr23016.html">Deposit Insurance National Bank of Santa Clara</a>. </p>
<p>At the end of 2022, <a href="https://www.cnbc.com/2023/03/10/silicon-valley-bank-is-shut-down-by-regulators-fdic-to-protect-insured-deposits.html">SVB had $175.4 billion in deposits</a>. It’s not clear how much of those deposits remain with the bank and how much of those are insured and 100% safe.</p>
<p>For depositors with $250,000 or less in cash at SVB, the FDIC said that customers will have access to all of their money when the bank reopens. </p>
<p>For those with uninsured deposits at SVB – basically anything above the FDIC limit of $250,000 – they may or may not receive back the rest of their money. These depositors will be given a <a href="https://www.fdic.gov/consumers/banking/facts/payment.html">“Receiver’s Certificate” by the FDIC</a> for the uninsured amount of their deposits. The FDIC has already said it will <a href="https://www.cnbc.com/2023/03/10/silicon-valley-bank-is-shut-down-by-regulators-fdic-to-protect-insured-deposits.html">pay some of the uninsured deposits by next week</a>, with additional payments possible as the regulator liquidates SVB’s assets. But if SVB’s investments have to be sold at a significant loss, uninsured depositors may not get any additional payment.</p>
<figure class="align-center ">
<img alt="men in uniform walk out of a building with glass doors under a sign that reads silicon valley bank" src="https://images.theconversation.com/files/514762/original/file-20230310-2087-c4fw8d.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/514762/original/file-20230310-2087-c4fw8d.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/514762/original/file-20230310-2087-c4fw8d.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/514762/original/file-20230310-2087-c4fw8d.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/514762/original/file-20230310-2087-c4fw8d.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/514762/original/file-20230310-2087-c4fw8d.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/514762/original/file-20230310-2087-c4fw8d.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Santa Clara Police officers exit Silicon Valley Bank.</span>
<span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/BanksInflation/29b034ff1a7f46cd84b931df656768bf/photo?Query=Silicon%20Valley%20bank&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=38&currentItemNo=0">AP Photo/Jeff Chiu</a></span>
</figcaption>
</figure>
<h2>What was the last US bank to fail?</h2>
<p>Prior to the failure of SVB, the most recent bank failures occurred in October 2020, when both <a href="https://www.fdic.gov/news/press-releases/2020/pr20119.html">Almena State Bank</a> in Kansas and <a href="https://www.fdic.gov/news/press-releases/2020/pr20112.html">First City Bank of Florida</a> were taken over by the FDIC. </p>
<p>Both of these banks were relatively small – with about $200 million in deposits combined. </p>
<p>SVB was the biggest bank to fail since September 2008, when <a href="https://www.thebalancemoney.com/washington-mutual-how-wamu-went-bankrupt-3305620">Washington Mutual failed with $307 billion in assets</a>. WaMu fell in the wake of investment bank Lehman Brothers’ collapse, which <a href="https://www.project-syndicate.org/topic/the-lehman-legacy">nearly took down the global financial system</a>. </p>
<p>On the whole, U.S. <a href="https://www.fdic.gov/resources/resolutions/bank-failures/failed-bank-list/">bank failures aren’t all that common</a>. For example, there were none in 2021 and 2022.</p>
<h2>Is there any risk that more banks might fail?</h2>
<p>At the end of 2022, <a href="https://www.federalreserve.gov/releases/lbr/current/">SVB was the 16th-largest bank in the United States</a> with $209 billion in assets.</p>
<p>That sounds like a lot – and it is – but that’s just 0.91% of <a href="https://fred.stlouisfed.org/series/TLAACBW027SBOG">all banking assets in the U.S</a>. There is little risk that SVB’s failure will spill over to other banks. </p>
<p>Having said that, SVB’s collapse does highlight the risk that many banks have in their investment portfolios. If interest rates continue to rise, and the <a href="https://www.nytimes.com/2023/03/07/business/economy/fed-powell-interest-rates.html">Federal Reserve has indicated that they will</a>, the value of the investment portfolios of banks across the U.S. will continue to go down. </p>
<p>While these losses are just on paper - meaning they’re not realized until the assets are sold – they <a href="https://www.stlouisfed.org/on-the-economy/2023/feb/rising-rates-complicate-banks-investment-portfolios">still can increase a bank’s overall risk</a>. How much the risk will go up will vary from bank to bank.</p>
<p>The good news is that most banks currently <a href="https://www.bankregdata.com//allLE.asp">have enough capital</a> to absorb these losses – however large – in part because of efforts taken by the Fed after the 2008 financial crisis to ensure financial firms can weather any storm. </p>
<p>So rest easy for now, the banking system is sound.</p><img src="https://counter.theconversation.com/content/201626/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>William Chittenden does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>SVB, as it’s known, collapsed with lightning speed following a run on its deposits.William Chittenden, Associate Professor of Finance, Texas State UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2002652023-02-21T04:55:05Z2023-02-21T04:55:05ZSee when Australia’s biggest banks stopped paying proper interest on your savings – and what you can do about it<figure><img src="https://images.theconversation.com/files/511334/original/file-20230221-24-soramb.png?ixlib=rb-1.1.0&rect=0%2C785%2C3389%2C1435&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Whenever interest rates went up in the past, I used to get told it wasn’t all bad news. At least it was good for some people: savers – people with money in the bank.</p>
<p>I hear a lot less of that these days.</p>
<p>If you’ve got money in the bank, you’re now lucky to earn anything at all. One in seven of the deposit dollars held by the Commonwealth bank (Australia’s biggest for deposits) is in a “transaction account” on which it <a href="https://images.theconversation.com/files/511239/original/file-20230220-18-uyzffw.PNG">no longer pays interest</a>. </p>
<p>Where interest is paid, it is so tiny compared to what it was that Treasurer Jim Chalmers this month directed the Australian Competition and Consumer Commission to conduct an <a href="https://www.accc.gov.au/media-release/accc-launches-inquiry-into-deposit-interest-rates">inquiry</a>, using its compulsory information-gathering powers.</p>
<p>The last time the commission conducted such an inquiry, into <a href="https://www.accc.gov.au/publications/residential-mortgage-price-inquiry-final-report">mortgage rates</a> in 2018, it gained access to nearly 40,000 documents from the big four banks and more than 7,000 from the smaller banks.</p>
<h2>Bad news for savers: when your rates began to fall</h2>
<p>What the commission is likely to find is that whereas transaction accounts stopped paying interest some time ago, so-called online accounts offering interest on large deposits were paying very reasonable interest – up until five years ago.</p>
<p>How do I know that’s the likely finding? Here’s what I found, when I graphed the Reserve Bank’s measure of the average online rate for a $10,000 deposit against the Reserve Bank’s cash rate, going back to 2010.</p>
<hr>
<p><iframe id="4oHRI" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/4oHRI/1/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<hr>
<p>What the graph shows is that, until about five years ago, the online rate for big deposits moved in line with the cash rate and (as it happened) almost exactly matched it. When the cash rate was 3%, the online deposit rate was 3%, and so on.</p>
<p>But from 2018, the deposit rate fell away. Except for the time when both rates were close to zero during the early years of COVID, the rate paid on large deposits has stayed well below the cash rate ever since.</p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/511276/original/file-20230221-14-vdhjax.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/511276/original/file-20230221-14-vdhjax.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/511276/original/file-20230221-14-vdhjax.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=969&fit=crop&dpr=1 600w, https://images.theconversation.com/files/511276/original/file-20230221-14-vdhjax.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=969&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/511276/original/file-20230221-14-vdhjax.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=969&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/511276/original/file-20230221-14-vdhjax.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1218&fit=crop&dpr=1 754w, https://images.theconversation.com/files/511276/original/file-20230221-14-vdhjax.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1218&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/511276/original/file-20230221-14-vdhjax.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1218&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Australian Banking Association chief Anna Bligh.</span>
<span class="attribution"><span class="source">Lukas Coch/AAP</span></span>
</figcaption>
</figure>
<p>That’s what the official figures say. But Anna Bligh, chief executive of the Australian Banking Association, sees them differently.</p>
<p>“This time last year, the four major banks, nobody, no bank was offering more than 0.3% on their savings account,” she told the <a href="https://www.afr.com/companies/financial-services/a-role-for-the-regulator-chalmers-warns-banks-to-lift-saving-rates-20230208-p5cirn">Australian Financial Review</a> this month. “Right now, they’re all offering at least 4% or more. So that’s a massive increase.”</p>
<p>But the rates Bligh quotes aren’t the standard ones. </p>
<p>The Commonwealth Bank is indeed paying 4% on its so-called NetBank Saver account, but the 4% is an introductory rate for new customers only – before slipping back to <a href="https://www.commbank.com.au/banking/netbank-saver.html">1.6%</a> after five months.</p>
<p>The web comparison site Canstar finds the average big bank introductory rate on $10,000 is <a href="https://images.theconversation.com/files/511271/original/file-20230221-28-xlcwh9.PNG">3.66%</a>, up from 0.24% before the Reserve Bank put up the cash rate by a total of 3.25 points.</p>
<p>But the average rate offered when the introductory bonus wears off has climbed by much less, from 0.05% to just <a href="https://images.theconversation.com/files/511271/original/file-20230221-28-xlcwh9.PNG">1.16%</a>.</p>
<h2>Complexity and suspected collusion makes switching hard</h2>
<p>And some of the high-looking rates have special conditions. </p>
<p>The Commonwealth’s GoalSaver account also offers 4%, but only if you put in more money in each month. If you can’t, or if you make a withdrawal, the rate plummets to <a href="https://www.commbank.com.au/banking/goal-saver.html">0.25%</a>.</p>
<p>The Australian Competition and Consumer Commission’s inquiry is likely to find that the complex nature of the deals makes switching hard, just as does the complex nature of electricity and health insurance deals.</p>
<p>That’s what it found about the bank’s <a href="https://www.accc.gov.au/publications/residential-mortgage-price-inquiry-final-report">mortgage offerings</a> in 2018.</p>
<p>It found the “opaque” nature of the offers inflated the costs of shopping around (including time and effort) and was one of the reasons why 70% of borrowers surveyed by one of the big banks said they signed up after getting just one quote.</p>
<p>It said the big four banks profited from the suppression of incentives to shop around and lacked strong incentives to make prices more transparent.</p>
<p>So why have the deposit rates offered by the big four banks dropped away?</p>
<p>When it came to mortgages, the ACCC suspected tacit collusion. Its 2018 report referred to a “synchronised” approach to rates seven times.</p>
<h2>Why the banks won’t act – unless we make them</h2>
<p>In very recent years, the banks have had less reason to offer high rates.
During the first 15 months of COVID, the Reserve Bank made available A$188 billion of funding to banks at the extraordinarily low rates of <a href="https://www.rba.gov.au/publications/bulletin/2021/sep/an-assessment-of-the-term-funding-facility.html">0.25% and 0.1%</a>.</p>
<p>This meant banks had less need to attract deposits, and in any event, they were overwhelmed with deposits. Elevated savings rates during COVID pushed an extra <a href="https://www.abs.gov.au/statistics/economy/national-accounts/australian-national-accounts-finance-and-wealth/sep-2022/5232034.xlsx">$300 billion</a> through their doors, as worried and locked-down households sought out safe places to stash cash.</p>
<p>Both of these things are changing. The last of the Reserve Bank’s cheap three-year loans to banks expires mid-next year, and households are stashing less into banks than they used to.</p>
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Read more:
<a href="https://theconversation.com/why-do-bankers-behave-badly-they-make-too-much-to-ask-questions-146685">Why do bankers behave badly? They make too much to ask questions</a>
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<p>It is possible deposit rates might be about to improve, all the more so because the banks will be under scrutiny until the ACCC inquiry reports at the end of the year.</p>
<p>When announcing the inquiry, the treasurer invoked fairness. Chalmers called on the banks to “pass on the interest rate rises to savers as quickly as you pass on the interest rate rises to mortgage holders”. </p>
<p>But fairness has little to do with it. The banks will pay depositors more only when they need to, or when they are pressured to. Until then, for many of us, deposits will earn next to nothing, regardless of where the Reserve Bank moves rates.</p>
<p>So if you’ve got a savings account, why not call up your bank, quote this article – and ask them what they’re going to do about it.</p><img src="https://counter.theconversation.com/content/200265/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Peter Martin does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>I graphed the average online rate for a $10,000 deposit against the Reserve Bank’s cash rate, going back to 2010. After seeing what that graph reveals, you’ll want to call your bank.Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.