1 00:00:10,240 --> 00:00:13,440 Speaker 1: Hello, and welcome to another episode of the All Thoughts Podcast. 2 00:00:13,520 --> 00:00:16,479 Speaker 1: I'm Tracy Alloway and I'm Joe. Wasn't all Joe? Do 3 00:00:16,520 --> 00:00:19,680 Speaker 1: you know what the average interest rate paid on US 4 00:00:19,720 --> 00:00:22,400 Speaker 1: bank accounts currently is? Holy? Because we just looked it 5 00:00:22,480 --> 00:00:24,279 Speaker 1: up and I couldn't blow it. I actually thought you 6 00:00:24,320 --> 00:00:26,840 Speaker 1: were wrong about as like I thought when you told 7 00:00:26,880 --> 00:00:30,479 Speaker 1: me the number that you must be a despel point off. Yeah, 8 00:00:30,880 --> 00:00:34,800 Speaker 1: it is surprising. So the average annual percentage yield er 9 00:00:34,840 --> 00:00:40,479 Speaker 1: ap Y according to bank rate is point two three percent. 10 00:00:40,880 --> 00:00:43,880 Speaker 1: And this at a time when, as you know, benchmark 11 00:00:43,920 --> 00:00:46,120 Speaker 1: interest rates are at like four and a half four 12 00:00:46,200 --> 00:00:50,400 Speaker 1: point seven five percent. I would have guessed that maybe 13 00:00:50,560 --> 00:00:53,080 Speaker 1: they were like one and a half. Two percent was 14 00:00:53,159 --> 00:00:55,560 Speaker 1: just still pretty low, right, So if you could get 15 00:00:55,600 --> 00:00:58,240 Speaker 1: four and a half percent as a bank an overnight rate, 16 00:00:58,680 --> 00:01:01,840 Speaker 1: and then it was like, okay, your saving your depositors, 17 00:01:01,920 --> 00:01:04,360 Speaker 1: check your account whatever, you get a couple percent that's 18 00:01:04,360 --> 00:01:07,680 Speaker 1: still spread, but they're still basically paying you nothing. I 19 00:01:07,840 --> 00:01:09,680 Speaker 1: just want to like hold your cash there, which is 20 00:01:09,680 --> 00:01:12,839 Speaker 1: pretty staggering. Absolutely, So this is a question that comes 21 00:01:12,920 --> 00:01:16,640 Speaker 1: up a lot, and it's obviously frustrating. If you are 22 00:01:16,800 --> 00:01:19,959 Speaker 1: a saver, you know, it's very everyone wants to be 23 00:01:20,120 --> 00:01:22,840 Speaker 1: a rentier to some extent, right, I'll want to make 24 00:01:22,880 --> 00:01:26,160 Speaker 1: money on our money exactly. That is the dream. So 25 00:01:26,200 --> 00:01:28,880 Speaker 1: if the banks aren't passing through those interest rate hikes, 26 00:01:28,880 --> 00:01:34,720 Speaker 1: it's naturally frustrating for retail depositors. However, it's also kind 27 00:01:34,720 --> 00:01:39,640 Speaker 1: of frustrating from an economic slash macroeconomic policy perspective, because 28 00:01:39,760 --> 00:01:42,640 Speaker 1: if you think about what monetary policy is supposed to do, 29 00:01:42,800 --> 00:01:45,960 Speaker 1: it is supposed to work through changes in interest rates, 30 00:01:45,959 --> 00:01:48,720 Speaker 1: which are supposed to ripple out from the central bank 31 00:01:48,840 --> 00:01:52,480 Speaker 1: into the rest of the economy. Right intuitively, like one 32 00:01:52,720 --> 00:01:55,640 Speaker 1: channel that you could imagine that rate hikes work through 33 00:01:55,800 --> 00:01:59,160 Speaker 1: is oh, look suddenly I'm getting a lot more money, 34 00:01:59,360 --> 00:02:02,800 Speaker 1: to say, or getting more Maybe I'll at the margin, 35 00:02:02,920 --> 00:02:05,400 Speaker 1: I'll save a little more because I'm getting paid to 36 00:02:05,560 --> 00:02:08,960 Speaker 1: spend a little less, create sort of decreased pressure in 37 00:02:09,000 --> 00:02:11,560 Speaker 1: the economy. I don't know if anyone ever really thinks 38 00:02:11,639 --> 00:02:13,440 Speaker 1: that way. It's like, oh, I'm not going to buy 39 00:02:13,600 --> 00:02:15,560 Speaker 1: like this watch, or I'm not going to buy these 40 00:02:15,680 --> 00:02:18,200 Speaker 1: like a concert tickets because I could get you know, 41 00:02:18,280 --> 00:02:21,440 Speaker 1: three percent having left this money in the bank. Nonetheless, 42 00:02:21,720 --> 00:02:24,040 Speaker 1: we have to get point two three percent. I'm definitely 43 00:02:24,120 --> 00:02:27,040 Speaker 1: gonna okay, I'm definitely going to keep spending in that case. 44 00:02:27,200 --> 00:02:29,359 Speaker 1: And of course there are ways to like get more 45 00:02:29,440 --> 00:02:31,080 Speaker 1: yield and you could lock it up, but if you 46 00:02:31,160 --> 00:02:33,399 Speaker 1: wanted to, you could go out, like buy a one 47 00:02:33,480 --> 00:02:36,680 Speaker 1: year CICA of deposits. Wo's not going to do that, 48 00:02:36,960 --> 00:02:39,639 Speaker 1: you know, You're not, Okay, it's so much to work. Okay, Well, 49 00:02:39,680 --> 00:02:42,000 Speaker 1: this is clearly something that we need to talk about, 50 00:02:42,440 --> 00:02:45,919 Speaker 1: both in the context of monetary policy and yes, broader economics. 51 00:02:45,960 --> 00:02:47,960 Speaker 1: And I am very pleased to say that we really 52 00:02:48,000 --> 00:02:50,520 Speaker 1: do have the perfect guest on this topic. We're going 53 00:02:50,560 --> 00:02:53,440 Speaker 1: to be speaking with Joe Abote. He is a money 54 00:02:53,520 --> 00:02:57,040 Speaker 1: market strategist over at Barclay's also does fixed income research. 55 00:02:57,120 --> 00:02:59,200 Speaker 1: I've been a fan of his work for a very 56 00:02:59,240 --> 00:03:01,960 Speaker 1: long time and happened meaning to get him on all 57 00:03:02,000 --> 00:03:05,040 Speaker 1: thoughts for just as long. So I'm very pleased to 58 00:03:05,040 --> 00:03:08,760 Speaker 1: have him here now to explain this discrepancy to us. Joe, 59 00:03:08,800 --> 00:03:16,000 Speaker 1: welcome to the show. Thank you. Nice to hear. Yes 60 00:03:16,080 --> 00:03:20,920 Speaker 1: and no. I think I think the fundamental problem with 61 00:03:21,639 --> 00:03:26,440 Speaker 1: bank deposit rates is that there's so many different types 62 00:03:26,639 --> 00:03:30,240 Speaker 1: of deposits, and because there's so many types of deposits, 63 00:03:30,240 --> 00:03:34,320 Speaker 1: it's hard to kind of come up with one comparable 64 00:03:34,400 --> 00:03:37,960 Speaker 1: interest rate across all banks and across all forms. Right, 65 00:03:38,000 --> 00:03:41,840 Speaker 1: So you have deposits a time, deposits for example, CDs 66 00:03:41,920 --> 00:03:45,840 Speaker 1: that you just mentioned, You've got checking account rates if 67 00:03:45,840 --> 00:03:48,920 Speaker 1: they pay interest at all, and then you've got you know, 68 00:03:49,080 --> 00:03:52,600 Speaker 1: different balance requirements for different types of customers and things 69 00:03:52,640 --> 00:03:56,240 Speaker 1: like that. So coming up with an explicit, one size 70 00:03:56,320 --> 00:04:02,560 Speaker 1: fits all bank deposit rate is difficult. But the phenomena 71 00:04:02,640 --> 00:04:06,680 Speaker 1: that you're describing where bank deposit rates in a rising 72 00:04:06,760 --> 00:04:10,640 Speaker 1: rate environment go up like a feather, and in a 73 00:04:10,680 --> 00:04:13,880 Speaker 1: interest rate cutting environment where the Fed is easing policy, 74 00:04:14,200 --> 00:04:19,039 Speaker 1: they sink like a stone. That's been a phenomena for decades. Well, 75 00:04:19,120 --> 00:04:21,719 Speaker 1: let's get into that then. So you know the FED 76 00:04:21,800 --> 00:04:26,560 Speaker 1: hikes rates on a Wednesday. Why doesn't that just automatically 77 00:04:26,600 --> 00:04:29,919 Speaker 1: translate to a bunch of banks emailing savers and saying 78 00:04:29,960 --> 00:04:32,320 Speaker 1: your deposit rate is going up? And I know there 79 00:04:32,360 --> 00:04:36,360 Speaker 1: are a couple that do seem to automatically raise saving rates, 80 00:04:36,360 --> 00:04:41,360 Speaker 1: but it's not the norm. Well, the question boils down 81 00:04:41,440 --> 00:04:44,520 Speaker 1: to kind of what does the bank need right in 82 00:04:44,640 --> 00:04:48,119 Speaker 1: terms of financing? Right, So most of its funding comes 83 00:04:48,160 --> 00:04:53,800 Speaker 1: from deposits, and banks have a fair amount of pricing 84 00:04:53,839 --> 00:04:56,920 Speaker 1: power when it comes to deposits, right, there's not many 85 00:04:56,960 --> 00:05:01,680 Speaker 1: substitutes for bank deposits out You might try a money 86 00:05:01,760 --> 00:05:06,760 Speaker 1: market fund, for example, or you might try, you know, 87 00:05:07,120 --> 00:05:09,440 Speaker 1: bills or like some of the things that you were 88 00:05:09,480 --> 00:05:11,240 Speaker 1: talking about, but you're not going to get the same 89 00:05:11,320 --> 00:05:16,159 Speaker 1: level of liquidity, for example, with deposit insurance that you 90 00:05:16,240 --> 00:05:20,320 Speaker 1: might with a bank deposit. And so if you're not 91 00:05:20,440 --> 00:05:23,839 Speaker 1: faced with a lot of competition, and I'm talking about 92 00:05:24,400 --> 00:05:28,920 Speaker 1: industry wide, then deposit rates don't necessarily have to go 93 00:05:29,040 --> 00:05:32,279 Speaker 1: up lockstep with the increase in the fent funds rate. 94 00:05:32,680 --> 00:05:36,400 Speaker 1: So to your point, you know, it's not terribly surprising 95 00:05:36,520 --> 00:05:40,920 Speaker 1: that deposit rates don't go up immediately when the FED 96 00:05:41,080 --> 00:05:45,960 Speaker 1: raises rates. Now, I will say that they do go up, 97 00:05:46,480 --> 00:05:51,479 Speaker 1: and the real issue is not so much the level 98 00:05:51,520 --> 00:05:55,040 Speaker 1: of rates, but the speed with which they go up, right, 99 00:05:55,720 --> 00:05:58,560 Speaker 1: And that becomes a question of what people call the 100 00:05:58,640 --> 00:06:03,279 Speaker 1: deposit data, which is how much of the monetary policy 101 00:06:03,400 --> 00:06:05,600 Speaker 1: rate or the change in the FED funds rate actually 102 00:06:05,640 --> 00:06:10,920 Speaker 1: gets passed on to depositors. And what happens is that 103 00:06:11,120 --> 00:06:16,440 Speaker 1: initially in the tightening cycle, banks are over deposited, and 104 00:06:16,520 --> 00:06:21,400 Speaker 1: as those deposits migrate into higher yielding products and they 105 00:06:21,440 --> 00:06:25,200 Speaker 1: lose financing, they start to compete more aggressively with each 106 00:06:25,240 --> 00:06:28,480 Speaker 1: other and they start to try to poach deposits from 107 00:06:28,480 --> 00:06:31,560 Speaker 1: one institution to the next. And what you see is 108 00:06:31,560 --> 00:06:36,320 Speaker 1: with subsequent rate heights, the deposit data right goes up. 109 00:06:36,880 --> 00:06:38,919 Speaker 1: And so what you normally find is that in the 110 00:06:39,000 --> 00:06:42,640 Speaker 1: last tightening cycle, for example, the pass through effect was 111 00:06:42,680 --> 00:06:47,039 Speaker 1: only about thirty five to forty of the rate heights 112 00:06:47,120 --> 00:06:51,159 Speaker 1: made it into bank deposit rates over the entire cycle. 113 00:06:51,880 --> 00:06:54,119 Speaker 1: But if you started at the cycle, it was down 114 00:06:54,200 --> 00:06:56,840 Speaker 1: around ten percent, and by the end of the cycle 115 00:06:56,880 --> 00:07:00,680 Speaker 1: it was closer to seventy five or eighty percent. And 116 00:07:00,760 --> 00:07:04,080 Speaker 1: that has happened, you know, pretty much every interest rate 117 00:07:04,120 --> 00:07:09,200 Speaker 1: cycle going back decades, which is start low and high, 118 00:07:09,240 --> 00:07:13,440 Speaker 1: but that the overall deposit beta for the cycle is 119 00:07:13,480 --> 00:07:17,720 Speaker 1: somewhere around thirty to forty of the Fed's rate ings. 120 00:07:17,720 --> 00:07:21,160 Speaker 1: And again, this is a competitive dynamic, right. There's not 121 00:07:21,240 --> 00:07:24,320 Speaker 1: a lot of substitutes for deposits out there, right that 122 00:07:24,440 --> 00:07:29,280 Speaker 1: offer the same level of deposit insurance or protection and liquidity. 123 00:07:30,040 --> 00:07:33,320 Speaker 1: Then you know, banks have a significant degree of pricing 124 00:07:33,360 --> 00:07:36,520 Speaker 1: power when it comes to deposits. So Joe, just on 125 00:07:36,560 --> 00:07:39,720 Speaker 1: that note, this idea that eventually deposit rates do go 126 00:07:39,920 --> 00:07:43,520 Speaker 1: up as the competitive process between banks kind of kicks in. 127 00:07:44,160 --> 00:07:46,480 Speaker 1: One piece of interesting research that I saw from the 128 00:07:46,480 --> 00:07:50,760 Speaker 1: New York Fed is this idea that deposit betas so 129 00:07:50,840 --> 00:07:54,000 Speaker 1: the relationship between you know, benchmark rates and what banks 130 00:07:54,000 --> 00:08:00,720 Speaker 1: are actually paying savers that they have been trending lower 131 00:08:01,280 --> 00:08:05,640 Speaker 1: in later interest rate cycles. So the beta now is 132 00:08:05,680 --> 00:08:08,240 Speaker 1: lower than it was in say like the early two 133 00:08:08,240 --> 00:08:11,640 Speaker 1: thousands hiking cycle. It's lower than it was and sort 134 00:08:11,680 --> 00:08:15,200 Speaker 1: of the most recent hiking cycle as well. What accounts 135 00:08:15,280 --> 00:08:17,800 Speaker 1: for that? You know, if I had to spect you that, 136 00:08:17,800 --> 00:08:20,640 Speaker 1: I'd say that there's probably two things that may account 137 00:08:20,680 --> 00:08:23,040 Speaker 1: for it. One is that Kewey has kind of changed 138 00:08:23,080 --> 00:08:25,480 Speaker 1: to the dynamics so that banks, you know, at the 139 00:08:25,520 --> 00:08:28,880 Speaker 1: beginning of a tightening cycle are significantly more over deposited 140 00:08:28,920 --> 00:08:32,120 Speaker 1: than they were in past tightening cycles. And that might 141 00:08:32,160 --> 00:08:36,840 Speaker 1: account for why deposit betas are lower, because banks have 142 00:08:36,880 --> 00:08:39,280 Speaker 1: a thicker cushion of deposits, and therefore they don't have 143 00:08:39,320 --> 00:08:41,720 Speaker 1: to compete as readily as they did or as quickly 144 00:08:41,800 --> 00:08:46,560 Speaker 1: as they did back in earlier tightening cycles. The second thing, 145 00:08:46,679 --> 00:08:50,840 Speaker 1: which I think doesn't get as much attention right is 146 00:08:50,840 --> 00:08:54,320 Speaker 1: the fact that I think banks increasingly, especially the larger 147 00:08:54,360 --> 00:09:00,440 Speaker 1: domestic institutions, are not competing specifically on explicit interests. And 148 00:09:00,480 --> 00:09:03,280 Speaker 1: I think what happens is that banks are able to 149 00:09:03,360 --> 00:09:11,720 Speaker 1: pay people, especially institutions, with services, and rather than compete 150 00:09:11,880 --> 00:09:17,439 Speaker 1: on interest rate, they compete on price services. So they 151 00:09:17,480 --> 00:09:22,000 Speaker 1: may offer discounts, you know, volume discounts, if you want 152 00:09:22,000 --> 00:09:26,280 Speaker 1: to think about it, and that that dynamic where you've 153 00:09:26,320 --> 00:09:31,520 Speaker 1: got competition occurring through you know, kind of a non 154 00:09:31,640 --> 00:09:36,880 Speaker 1: price mechanism, a non interest price mechanism, may alter how 155 00:09:37,040 --> 00:09:40,640 Speaker 1: datas perform a tightening cycles. So I think that's probably 156 00:09:40,679 --> 00:09:42,840 Speaker 1: I think those are probably the two main reasons why 157 00:09:43,760 --> 00:09:47,720 Speaker 1: deposit datas are not as high as they were in 158 00:09:47,840 --> 00:09:52,920 Speaker 1: previous cycles. So could factors like the quality of an 159 00:09:52,960 --> 00:09:56,520 Speaker 1: online app, the size of the network, the ease of 160 00:09:56,559 --> 00:10:02,800 Speaker 1: the website, the interconnectedness of a big banks website with 161 00:10:02,880 --> 00:10:05,880 Speaker 1: payment apps like zell and other things like that, Like 162 00:10:06,000 --> 00:10:10,080 Speaker 1: could Lease essentially be selling points where just bank X. 163 00:10:10,120 --> 00:10:12,080 Speaker 1: I won't name any specific banks because I don't know 164 00:10:12,120 --> 00:10:14,880 Speaker 1: the details. Bank excess look we have this great app, 165 00:10:14,920 --> 00:10:17,520 Speaker 1: we have this great integration with all these things. Are 166 00:10:17,520 --> 00:10:21,240 Speaker 1: you really going to move your you know, eight thousand 167 00:10:21,280 --> 00:10:25,040 Speaker 1: dollars checking account over to why for one extra bank? 168 00:10:25,080 --> 00:10:27,040 Speaker 1: Why for one extra percent? It's going to be like, 169 00:10:27,120 --> 00:10:29,360 Speaker 1: you know, fifteen dollars extra a year and all the 170 00:10:29,440 --> 00:10:33,120 Speaker 1: has to details. Yes, I think that. I think that's 171 00:10:33,120 --> 00:10:36,920 Speaker 1: exactly right. I would also say that there's a time 172 00:10:36,960 --> 00:10:41,720 Speaker 1: tax involved too, right, which is kind of the corollary 173 00:10:41,720 --> 00:10:44,680 Speaker 1: of this, which is that your paycheck is linked directly 174 00:10:44,679 --> 00:10:50,120 Speaker 1: to your checking account and you know, migrating it to 175 00:10:50,280 --> 00:10:55,040 Speaker 1: a different bank requires you know, kind of contacting HR 176 00:10:55,280 --> 00:10:59,640 Speaker 1: or probably filling out online forms at your office to 177 00:10:59,720 --> 00:11:03,520 Speaker 1: kind of change the direction. And that's a hassle. And 178 00:11:03,720 --> 00:11:08,840 Speaker 1: I think the hassle effect is probably what keeps deposits sticky, 179 00:11:09,280 --> 00:11:12,160 Speaker 1: as well as the service effect that you mentioned, right, 180 00:11:12,200 --> 00:11:17,360 Speaker 1: the non non price services. I would suspect that the 181 00:11:17,360 --> 00:11:22,480 Speaker 1: effect is actually bigger for institutional deposits than it is 182 00:11:22,520 --> 00:11:27,960 Speaker 1: for retail depositors. Right, that institutions obviously face much bigger 183 00:11:28,000 --> 00:11:33,439 Speaker 1: costs switching banks. In addition to other non price services, 184 00:11:33,440 --> 00:11:37,360 Speaker 1: which might include investment banking advice or things along that nature. 185 00:11:37,920 --> 00:11:41,720 Speaker 1: That make deposits a little bit more sticky at the 186 00:11:41,760 --> 00:11:45,280 Speaker 1: institutional level as well as it's a retail level, so 187 00:11:45,320 --> 00:11:48,800 Speaker 1: it's not just retail but also institutions. Right, if you're 188 00:11:48,920 --> 00:11:51,440 Speaker 1: a treasurer for a large company, I can imagine that 189 00:11:51,480 --> 00:11:55,760 Speaker 1: there's a whole process to changing your preferred bank. Right. 190 00:11:56,000 --> 00:11:59,320 Speaker 1: You know, Tracy and our producer Dash, I'm not going 191 00:11:59,360 --> 00:12:01,760 Speaker 1: to say which one, but they're both customers of a 192 00:12:01,840 --> 00:12:05,760 Speaker 1: certain large banks fintech arm and they're also talking about 193 00:12:05,760 --> 00:12:08,600 Speaker 1: always talking about like the juicy interest rates they're getting 194 00:12:08,600 --> 00:12:11,640 Speaker 1: on their checking accounts. But it does seem like kind 195 00:12:11,679 --> 00:12:13,640 Speaker 1: of a hosshold. So yes, it is more money, but 196 00:12:13,800 --> 00:12:16,520 Speaker 1: I don't really want to deal with it. What you know, 197 00:12:16,520 --> 00:12:20,520 Speaker 1: when we talk about competition, what about sort of like 198 00:12:20,840 --> 00:12:24,720 Speaker 1: classical ideas about market structure in terms of the number 199 00:12:24,760 --> 00:12:27,280 Speaker 1: of banks, the size of the banks, the rise of 200 00:12:27,280 --> 00:12:32,360 Speaker 1: like a handful of these mega national banks, and does 201 00:12:32,400 --> 00:12:35,440 Speaker 1: that play and you roll in the sort of decline 202 00:12:35,480 --> 00:12:38,600 Speaker 1: and deposit betas over time. You know, I'm not an 203 00:12:38,679 --> 00:12:43,199 Speaker 1: industry analyst at that level. You know, we do have 204 00:12:43,240 --> 00:12:45,640 Speaker 1: a lot of banks in the US, and there is 205 00:12:46,080 --> 00:12:54,920 Speaker 1: definitely a convenience factor to location. So hard to know 206 00:12:56,640 --> 00:13:00,080 Speaker 1: how that plays out, at least in my mind in 207 00:13:00,160 --> 00:13:03,920 Speaker 1: terms of deposit concentration. But deposits are definitely concentrated in 208 00:13:03,960 --> 00:13:06,240 Speaker 1: the US at the largest banks. I will say that 209 00:13:07,240 --> 00:13:10,280 Speaker 1: now again, is that because of the stickiness of those banks, 210 00:13:11,320 --> 00:13:16,480 Speaker 1: or the convenience or their online services or their network effects. 211 00:13:16,880 --> 00:13:31,959 Speaker 1: I suspect it's a variety of everything. So one thing 212 00:13:32,000 --> 00:13:34,440 Speaker 1: I wanted to ask is, you know, the way sort 213 00:13:34,440 --> 00:13:37,680 Speaker 1: of retail deposits are supposed to work is you give 214 00:13:37,720 --> 00:13:41,960 Speaker 1: the bank money, they pay you some interest, and the 215 00:13:42,080 --> 00:13:45,800 Speaker 1: interest is coming from I guess the array of central 216 00:13:45,840 --> 00:13:49,520 Speaker 1: bank facilities nowadays, but also from the bank taking your 217 00:13:49,559 --> 00:13:53,360 Speaker 1: money and lending it out into the wider economy. So 218 00:13:53,600 --> 00:13:57,800 Speaker 1: to what degree our bank deposit rates also a function 219 00:13:57,960 --> 00:14:02,000 Speaker 1: of the lending or investment opportunities that banks see in 220 00:14:02,000 --> 00:14:05,240 Speaker 1: the market. The primary driver is going to be asset 221 00:14:05,240 --> 00:14:08,760 Speaker 1: growth on the bank side, right, That determines how competitive 222 00:14:08,800 --> 00:14:12,200 Speaker 1: banks have to be in deposits. And so if you 223 00:14:12,200 --> 00:14:14,720 Speaker 1: think about the bank's balance sheet on the asset side, 224 00:14:14,720 --> 00:14:17,720 Speaker 1: it's got essentially three types of assets. It's got loans, 225 00:14:18,160 --> 00:14:21,400 Speaker 1: it's got cash that it has to maintain for regulatory purposes. 226 00:14:21,400 --> 00:14:24,920 Speaker 1: At the few reserve and it's got securities holdings. Right 227 00:14:25,360 --> 00:14:28,760 Speaker 1: on the liability side, most of its funding comes in 228 00:14:28,800 --> 00:14:32,040 Speaker 1: the form of deposits of some kind, and there's an 229 00:14:32,080 --> 00:14:35,600 Speaker 1: advantage to deposits, especially retail deposits, because as you said, 230 00:14:35,840 --> 00:14:38,880 Speaker 1: they are pretty sticky, right, and the stickiness is partly 231 00:14:38,920 --> 00:14:41,400 Speaker 1: a function of the services, but it's also a function 232 00:14:41,440 --> 00:14:47,440 Speaker 1: of government guaranteed deposit insurance as well. In addition to that, 233 00:14:47,520 --> 00:14:50,400 Speaker 1: there's wholesale funding that they can rely on. Now, whether 234 00:14:50,480 --> 00:14:56,920 Speaker 1: that's commercial paper or turned financing, corporate debt, etc. These 235 00:14:56,920 --> 00:15:01,720 Speaker 1: are all supplemental forms of funding that they can rely 236 00:15:01,920 --> 00:15:06,920 Speaker 1: on to camp up their funding as asset growth, you know, 237 00:15:07,000 --> 00:15:10,560 Speaker 1: as assets growth, and so from banks perspective, it's got 238 00:15:10,560 --> 00:15:13,040 Speaker 1: to figure out and it's got to balance on the 239 00:15:13,080 --> 00:15:18,040 Speaker 1: asset side the interest returns on its earning versus interest 240 00:15:18,080 --> 00:15:21,320 Speaker 1: costs of raising more deposits are raising more wholesale funding, 241 00:15:21,600 --> 00:15:26,120 Speaker 1: and that balancing act is really blue way Monetary policy 242 00:15:26,280 --> 00:15:31,120 Speaker 1: is expected to unfold, right, Monetary policy is expected to 243 00:15:31,200 --> 00:15:34,840 Speaker 1: kind of influence that dynamic. The asset side of the 244 00:15:34,840 --> 00:15:38,920 Speaker 1: balance sheet determines how you decide to fund it, whether 245 00:15:39,000 --> 00:15:42,400 Speaker 1: you're using deposits, which are probably the cheapest, stickiest form 246 00:15:42,440 --> 00:15:46,560 Speaker 1: of funding, or whether you're using wholesale funding right, which 247 00:15:46,600 --> 00:15:50,400 Speaker 1: is a little bit more expensive, more flight prone, but 248 00:15:50,920 --> 00:15:54,720 Speaker 1: you know, depending on your size, may be easier to 249 00:15:54,880 --> 00:15:58,080 Speaker 1: raise because you have more market access than say a 250 00:15:58,160 --> 00:16:02,720 Speaker 1: smaller institution. So it becomes kind of a question of 251 00:16:03,040 --> 00:16:06,440 Speaker 1: at least monetary policy becomes a question of how to 252 00:16:06,560 --> 00:16:12,880 Speaker 1: banks triage between their asset growth deposit the loans securities 253 00:16:12,880 --> 00:16:17,280 Speaker 1: in cash versus their liability side deposits and wholesale funding 254 00:16:17,360 --> 00:16:21,040 Speaker 1: for its commercial paper, corporate bonds, other you know, kind 255 00:16:21,040 --> 00:16:23,880 Speaker 1: of term financing that's available out there, and that kind 256 00:16:23,880 --> 00:16:27,320 Speaker 1: of balancing is the way monetary policy is supposed to 257 00:16:27,360 --> 00:16:32,120 Speaker 1: affect bank lending decisions and the transmission of the Fed's 258 00:16:32,200 --> 00:16:36,160 Speaker 1: interest rate changes. Can you talk a little bit more 259 00:16:36,360 --> 00:16:41,840 Speaker 1: about how retail deposits as a source of funding, their 260 00:16:41,960 --> 00:16:44,760 Speaker 1: role in twenty twenty three or twenty twenty two or 261 00:16:44,760 --> 00:16:49,240 Speaker 1: whatever versus the past, What is the like how would 262 00:16:49,280 --> 00:16:51,840 Speaker 1: you know if we're having this conversation in the nineties 263 00:16:52,160 --> 00:16:55,040 Speaker 1: or early two thousands, what is the role of retail 264 00:16:55,080 --> 00:16:58,320 Speaker 1: deposits as a source of funding then versus today? Has 265 00:16:58,360 --> 00:17:01,440 Speaker 1: it changed? Yeah? So what I would say is that 266 00:17:01,520 --> 00:17:06,600 Speaker 1: retail deposits have actually become more important over time because 267 00:17:06,600 --> 00:17:09,399 Speaker 1: of regulatory changes. So if you're called back before the 268 00:17:09,440 --> 00:17:14,040 Speaker 1: financial crisis, one of the things that was happening was 269 00:17:14,080 --> 00:17:19,040 Speaker 1: that banks were increasingly reliant on wholesale funding. And they 270 00:17:19,160 --> 00:17:21,199 Speaker 1: went to wholesale funding because it was cheap and it 271 00:17:21,280 --> 00:17:26,440 Speaker 1: was readily available. But the result of that wholesale funding 272 00:17:26,480 --> 00:17:29,600 Speaker 1: reliance was that a lot of their funding became very 273 00:17:29,680 --> 00:17:35,199 Speaker 1: very rate sensitive and very rate or rather very flight prone. 274 00:17:35,960 --> 00:17:39,600 Speaker 1: And you can imagine an extreme situation where you're financing 275 00:17:39,680 --> 00:17:43,119 Speaker 1: let's say, thirty year mortgages and you're financing them on 276 00:17:43,160 --> 00:17:46,080 Speaker 1: an overnight basis in the repo market, you have a 277 00:17:46,160 --> 00:17:51,040 Speaker 1: significant maturity mismatch, right where if that repo funding can't 278 00:17:51,040 --> 00:17:55,040 Speaker 1: be rolled, you lose your source of financing for those mortgages. 279 00:17:55,680 --> 00:17:58,920 Speaker 1: And so one of the consequences of the financial crisis 280 00:17:59,040 --> 00:18:02,560 Speaker 1: when we aw that funding was as light prone as 281 00:18:02,600 --> 00:18:07,520 Speaker 1: it was, particularly in these markets, regulators kind of emphasize 282 00:18:07,640 --> 00:18:10,920 Speaker 1: the need for banks to a hold more liquidity, whether 283 00:18:10,960 --> 00:18:14,800 Speaker 1: it's told higher cash balances at the FED right and 284 00:18:14,960 --> 00:18:21,120 Speaker 1: simultaneously rely more heavily on wholesale funding on retail funding, 285 00:18:21,440 --> 00:18:24,600 Speaker 1: that is deposit based funding. And so we've seen over 286 00:18:24,600 --> 00:18:28,080 Speaker 1: the last really twenty years or so as a decline 287 00:18:28,119 --> 00:18:32,600 Speaker 1: in the ratio of repo funding CP market funding, you know, 288 00:18:32,640 --> 00:18:35,640 Speaker 1: kind of these financial instruments of short maturities and we're 289 00:18:35,680 --> 00:18:38,840 Speaker 1: financing asset growth, you know, before two thousand and six, 290 00:18:39,359 --> 00:18:43,280 Speaker 1: and those have been replaced by more deposit funding now. 291 00:18:43,440 --> 00:18:46,840 Speaker 1: As I said earlier, initially that would be reflected in 292 00:18:46,960 --> 00:18:50,240 Speaker 1: higher deposit rates. Of course, que at the time at 293 00:18:50,280 --> 00:18:54,720 Speaker 1: suppress deposit rates. And if you recall that before twenty 294 00:18:54,880 --> 00:18:59,160 Speaker 1: and twelve, right, we had unlimited deposit insurance on transaction 295 00:18:59,280 --> 00:19:02,040 Speaker 1: fought accounts for a while, right, in order to kind 296 00:19:02,080 --> 00:19:07,120 Speaker 1: of keep funding stable for banks. What's happened since then, right, 297 00:19:07,160 --> 00:19:09,719 Speaker 1: as as interest rates go up, as I said earlier, 298 00:19:09,760 --> 00:19:12,159 Speaker 1: banks have been able to compete on non price or 299 00:19:12,280 --> 00:19:15,720 Speaker 1: non interest rate services more and the deposits have kind 300 00:19:15,720 --> 00:19:18,840 Speaker 1: of remained sticky. So you have this kind of wholesale 301 00:19:18,880 --> 00:19:23,600 Speaker 1: shift away from kind of wholesale funding to retail deposits. 302 00:19:24,000 --> 00:19:25,920 Speaker 1: And if you want to go back even further, this 303 00:19:26,080 --> 00:19:29,600 Speaker 1: looks more akin to an environment that kind of existed, 304 00:19:30,440 --> 00:19:33,680 Speaker 1: you know, prior to the nineteen eighties, right, to an 305 00:19:33,760 --> 00:19:38,480 Speaker 1: environment where banks were much more deposit reliant and much 306 00:19:38,560 --> 00:19:43,159 Speaker 1: less relying on financial products. And if you look back, 307 00:19:43,520 --> 00:19:47,520 Speaker 1: you know further, this is kind of really beckons to 308 00:19:47,640 --> 00:19:50,640 Speaker 1: an era of you know, kind of pre interest rate 309 00:19:50,720 --> 00:19:54,960 Speaker 1: decontrol for nineteen eighty. But again that's that's going back 310 00:19:55,240 --> 00:19:59,200 Speaker 1: a lot of many, many many years now, right, So, 311 00:19:59,560 --> 00:20:02,800 Speaker 1: depot sets are more important as a source of bank 312 00:20:02,840 --> 00:20:06,160 Speaker 1: funding thanks to the experience of the financial crisis and 313 00:20:06,359 --> 00:20:11,120 Speaker 1: post GFC regulation, and at the same time, because we've 314 00:20:11,160 --> 00:20:15,280 Speaker 1: had things like que a lot of banks are simply 315 00:20:15,400 --> 00:20:19,280 Speaker 1: swimming in deposits to the extent that they kind of 316 00:20:19,359 --> 00:20:23,000 Speaker 1: have more than they perhaps need, which means that they 317 00:20:23,000 --> 00:20:28,040 Speaker 1: are willing to allow depositors to maybe look elsewhere for 318 00:20:28,119 --> 00:20:35,000 Speaker 1: better rates. They are However, some banks are losing deposits 319 00:20:35,000 --> 00:20:38,720 Speaker 1: faster than other banks. Yes, I wanted you to bring 320 00:20:38,760 --> 00:20:42,440 Speaker 1: this up. This is the small bank versus large bank 321 00:20:42,520 --> 00:20:46,159 Speaker 1: deposit experience. And also this dovetails with a previous episode 322 00:20:46,680 --> 00:20:50,359 Speaker 1: on discount lending, the discount window. I'm sorry I missed 323 00:20:50,400 --> 00:20:56,280 Speaker 1: that discount window lending piece, but I think you're exactly 324 00:20:56,400 --> 00:21:01,480 Speaker 1: right here, which is that the level of deposits and 325 00:21:01,640 --> 00:21:04,240 Speaker 1: the level of bank reserves in the system. That is, 326 00:21:04,280 --> 00:21:08,720 Speaker 1: the cash and the liquidity circulating in the system is important, 327 00:21:09,320 --> 00:21:13,679 Speaker 1: but so too is the distribution of those balances across institutions. 328 00:21:14,359 --> 00:21:18,760 Speaker 1: And what we're seeing is that unlike QT or quantitative 329 00:21:18,800 --> 00:21:25,080 Speaker 1: tightening in twenty seventeen, the deposits are leaving right, or 330 00:21:25,119 --> 00:21:30,080 Speaker 1: at least the cash is leaving small banks faster than 331 00:21:30,119 --> 00:21:32,880 Speaker 1: it's leaving the large banks, and so that the smaller 332 00:21:32,920 --> 00:21:37,120 Speaker 1: banks are forced to compete more aggressively in deposit markets 333 00:21:37,440 --> 00:21:41,280 Speaker 1: than say they're larger banks. Now, part of this is 334 00:21:41,359 --> 00:21:45,280 Speaker 1: a reflection of the fact that when QT occurred, right, 335 00:21:45,400 --> 00:21:50,240 Speaker 1: deposit balance is migrated to the largest institutions out there, 336 00:21:50,280 --> 00:21:54,439 Speaker 1: again because deposits are heavily concentrated, and so those banks 337 00:21:54,480 --> 00:21:58,560 Speaker 1: tended to be more over deposited relatively speaking than the 338 00:21:58,600 --> 00:22:02,159 Speaker 1: smaller institutions. That when the FED is braining reserves and 339 00:22:02,240 --> 00:22:05,879 Speaker 1: shrinking its balance sheet, the people that have less liquidity 340 00:22:05,920 --> 00:22:09,080 Speaker 1: to start off with because they had less fewer deposits, 341 00:22:09,119 --> 00:22:13,480 Speaker 1: those are the institutions that are experiencing more deposit rate pressure. 342 00:22:15,119 --> 00:22:18,439 Speaker 1: How do the small banks even compete? I mean, I 343 00:22:18,440 --> 00:22:21,040 Speaker 1: guess rods as you say, but like, is this like 344 00:22:21,119 --> 00:22:24,120 Speaker 1: going to be a permanent condition of banking. This struggle 345 00:22:24,200 --> 00:22:28,400 Speaker 1: that the small banks have for deposits relative to these high, 346 00:22:28,560 --> 00:22:36,520 Speaker 1: high networked large national banks. Again, you know, small banks 347 00:22:36,520 --> 00:22:42,360 Speaker 1: would argue that there are you know, advantages to banking locally, 348 00:22:42,880 --> 00:22:46,320 Speaker 1: and that the advantages to banking locally is, you know, 349 00:22:46,520 --> 00:22:52,240 Speaker 1: your mortgage lender knows the market right, knows the housing 350 00:22:52,280 --> 00:22:56,800 Speaker 1: market in your area, your commercial banker knows your business, 351 00:22:57,280 --> 00:23:02,800 Speaker 1: knows your knows you personally, etc. And so there's you know, 352 00:23:02,840 --> 00:23:06,720 Speaker 1: So I wouldn't say that it's inevitable that all deposits 353 00:23:06,720 --> 00:23:10,760 Speaker 1: will migrate to large institutions, and large institutions will be 354 00:23:11,160 --> 00:23:14,280 Speaker 1: selective and paying deposit rates. I still think that there's 355 00:23:14,400 --> 00:23:19,040 Speaker 1: enough competition between large and small banks right that you know, 356 00:23:19,119 --> 00:23:23,159 Speaker 1: small banks are not going away at all. But again, 357 00:23:23,640 --> 00:23:28,280 Speaker 1: this deposit competition that we're experiencing right now is the 358 00:23:28,320 --> 00:23:32,639 Speaker 1: aftershock of quantitative easing, right. Quantitative easing and the buying 359 00:23:32,640 --> 00:23:36,600 Speaker 1: of treasury securities and mortgages again ended up putting a 360 00:23:36,640 --> 00:23:39,680 Speaker 1: lot of deposits into the system as a whole. But 361 00:23:39,880 --> 00:23:42,879 Speaker 1: those deposits tended to pile up faster at the larger 362 00:23:42,920 --> 00:23:47,080 Speaker 1: institutions than the smaller institutions. So just on that note, 363 00:23:47,119 --> 00:23:49,359 Speaker 1: and you already touched on this, but can you dig 364 00:23:49,400 --> 00:23:52,719 Speaker 1: in a little bit more into what QT or quantitative 365 00:23:52,800 --> 00:23:58,320 Speaker 1: tightening actually means for I guess the effectiveness of monetary 366 00:23:58,400 --> 00:24:02,080 Speaker 1: policy is it does it like mechanically ramp up that 367 00:24:02,200 --> 00:24:08,000 Speaker 1: competition for depositors, or does it maybe encourage some sort 368 00:24:08,040 --> 00:24:11,919 Speaker 1: of substitution effect where you know, banks can I don't know, 369 00:24:12,359 --> 00:24:17,080 Speaker 1: replace bank deposits with great sensitive treasuries or something like that. 370 00:24:18,119 --> 00:24:21,320 Speaker 1: That's again an important distinction, and I think what you 371 00:24:21,400 --> 00:24:25,640 Speaker 1: have to look at here is the demand curve or 372 00:24:25,840 --> 00:24:29,400 Speaker 1: bank reserves, right. This is the liquidity that's in the system, 373 00:24:30,000 --> 00:24:32,879 Speaker 1: created from quee right from the asset side of the 374 00:24:32,880 --> 00:24:36,040 Speaker 1: fed's balance sheet, and these reserves are used to me 375 00:24:37,240 --> 00:24:43,080 Speaker 1: int day requirements for settling payments as well as liquidity 376 00:24:43,119 --> 00:24:46,600 Speaker 1: requirements for regulatory purposes that banks are required to maintain. 377 00:24:47,720 --> 00:24:51,000 Speaker 1: And as the FED lets the assets on its balance 378 00:24:51,040 --> 00:24:55,000 Speaker 1: sheet roll off right and doesn't replace them, so that 379 00:24:55,040 --> 00:24:59,760 Speaker 1: it's balance sheet shrinks, bank reserves go down, right, and 380 00:25:00,080 --> 00:25:04,320 Speaker 1: the decline in bank reserves is what forces banks right 381 00:25:04,440 --> 00:25:07,760 Speaker 1: ultimately to compete more aggressively in deposit markets because they 382 00:25:07,800 --> 00:25:12,520 Speaker 1: need to restore that cash position on their balance sheet. 383 00:25:12,560 --> 00:25:15,560 Speaker 1: In addition to the fact that their assets growing, right, 384 00:25:15,560 --> 00:25:18,800 Speaker 1: they're making loans, they need to replace that funding. The 385 00:25:19,040 --> 00:25:25,000 Speaker 1: extent to which QT creates reserve pressure, right, is what 386 00:25:25,200 --> 00:25:27,919 Speaker 1: creates the pressure on the FED funds rate. Right, the 387 00:25:27,960 --> 00:25:32,240 Speaker 1: Fed's policy instrument and determines ultimately where the FED funds 388 00:25:32,320 --> 00:25:38,000 Speaker 1: rate trades within its target band. Right. So what the 389 00:25:38,040 --> 00:25:40,119 Speaker 1: FED wants to do is, if you think about the 390 00:25:40,200 --> 00:25:45,560 Speaker 1: demand curve, demand curve is probably for bank reserves is 391 00:25:45,560 --> 00:25:50,600 Speaker 1: probably I'm going to get this wrong concave shape, right, 392 00:25:50,600 --> 00:25:53,320 Speaker 1: so it kind of caves in in the middle, and 393 00:25:53,400 --> 00:25:56,960 Speaker 1: when you get to the upper part of the demand curve, right, 394 00:25:57,840 --> 00:26:01,119 Speaker 1: you're in the steep slope. The steep slope of that 395 00:26:01,200 --> 00:26:03,760 Speaker 1: demand curve means is that changes in the level of 396 00:26:03,800 --> 00:26:09,119 Speaker 1: bank reserves creates significant changes in interest rates. And the goal, 397 00:26:09,640 --> 00:26:14,600 Speaker 1: right from the Fed's perspective, is merely to shift the 398 00:26:14,600 --> 00:26:17,800 Speaker 1: supply of bank reserves so that it's in the gently 399 00:26:17,920 --> 00:26:21,760 Speaker 1: sloping part of the demand curve. Right, that the level 400 00:26:21,800 --> 00:26:26,320 Speaker 1: of bank reserves is ample, right, but not abundant. An 401 00:26:26,400 --> 00:26:29,720 Speaker 1: ample means that it's not scarce, right, so that the 402 00:26:29,880 --> 00:26:32,320 Speaker 1: level of the Fed funds are a relative to other 403 00:26:32,440 --> 00:26:36,800 Speaker 1: market rates or within the band. Right, it's comfortably in 404 00:26:36,840 --> 00:26:39,399 Speaker 1: the middle. Right. Remember, the Fed is is targeting a 405 00:26:39,480 --> 00:26:41,679 Speaker 1: twenty five bases point band between the top and the 406 00:26:41,680 --> 00:26:44,000 Speaker 1: bottom of the Fed funds rate, and the goal is 407 00:26:44,000 --> 00:26:45,840 Speaker 1: to kind of keep the Fed funds rate, you know, 408 00:26:46,640 --> 00:26:50,080 Speaker 1: within the midpoint, let's say, of that band, right or 409 00:26:50,119 --> 00:26:53,320 Speaker 1: close to that midpoint. So again, you want to stay 410 00:26:53,359 --> 00:26:55,560 Speaker 1: away from the steep part of the demand curve. But 411 00:26:55,600 --> 00:27:00,080 Speaker 1: it's the same respect right, unless you're you know, substantial 412 00:27:00,119 --> 00:27:04,120 Speaker 1: easing policy and you've pushed rates to zero. You also 413 00:27:04,160 --> 00:27:06,320 Speaker 1: want to stay away from the super platform of the 414 00:27:06,320 --> 00:27:09,400 Speaker 1: demander right where you've got bank reserves and access. At 415 00:27:09,400 --> 00:27:13,320 Speaker 1: four trillion dollars, interest rates are totally unresponsive to the 416 00:27:13,400 --> 00:27:16,119 Speaker 1: level of liquidity in the system because you've effectively driven 417 00:27:16,200 --> 00:27:20,160 Speaker 1: rates to zero. Right. So again that's that's kind of 418 00:27:21,119 --> 00:27:23,840 Speaker 1: a long winded way of describing what the goal of 419 00:27:23,920 --> 00:27:27,159 Speaker 1: QT is, Right, create enough pressure on interest rates but 420 00:27:27,240 --> 00:27:42,480 Speaker 1: not too much. How do you have an estimate for 421 00:27:42,560 --> 00:27:48,040 Speaker 1: how small the fit is going to shrink its balanchid ultimately? So, uh, 422 00:27:48,800 --> 00:27:51,600 Speaker 1: this is pretty complicated, and I think you have to 423 00:27:51,680 --> 00:27:54,399 Speaker 1: be pretty humble, we should ask what the level of 424 00:27:55,240 --> 00:27:57,960 Speaker 1: ample excess reserves is too, just to get all the 425 00:27:58,080 --> 00:28:02,040 Speaker 1: all the loaded questions out there, all right, So my 426 00:28:02,280 --> 00:28:08,200 Speaker 1: sense is that the level of ample reserves is probably 427 00:28:08,240 --> 00:28:12,320 Speaker 1: around two point seven trillion dollars. But I'm a little 428 00:28:12,320 --> 00:28:17,520 Speaker 1: bit cautious about that because I think the level of 429 00:28:17,720 --> 00:28:22,800 Speaker 1: reserves is less important than the ratio of reserve balances 430 00:28:22,960 --> 00:28:25,919 Speaker 1: is to the total cash total assets that banks have. 431 00:28:26,840 --> 00:28:30,240 Speaker 1: So that if you look at twenty nineteen, when we 432 00:28:30,280 --> 00:28:34,000 Speaker 1: saw all that bank reserves got too thin, we saw 433 00:28:34,160 --> 00:28:38,480 Speaker 1: that going back to our demand curve, right, the ratio 434 00:28:38,720 --> 00:28:43,880 Speaker 1: of bank cash assets to total assets strength below eight percent. 435 00:28:44,560 --> 00:28:47,800 Speaker 1: So the eight percent mark is kind of the threshold 436 00:28:48,040 --> 00:28:52,600 Speaker 1: that divides ample from scares, and so my senses, you 437 00:28:52,640 --> 00:28:56,040 Speaker 1: want to keep bank reserves in terms of ample around 438 00:28:56,080 --> 00:29:01,320 Speaker 1: eight percent or higher. Right at the moment, they're around 439 00:29:01,400 --> 00:29:06,880 Speaker 1: nine percent. If you break that number down between domestic 440 00:29:06,920 --> 00:29:11,120 Speaker 1: banks and small banks, right, you see a very different picture. Right, 441 00:29:11,520 --> 00:29:14,520 Speaker 1: domestic banks, that ratio is around ten and a half percent, 442 00:29:14,960 --> 00:29:18,880 Speaker 1: and they're probably still two percentage points or more away 443 00:29:18,920 --> 00:29:22,840 Speaker 1: from that twenty nineteen level where they were scarce. If 444 00:29:22,840 --> 00:29:26,640 Speaker 1: you look at small banks, they're around six percent sense, 445 00:29:27,160 --> 00:29:31,440 Speaker 1: and that's much closer to where they were in twenty nineteen. 446 00:29:32,200 --> 00:29:36,640 Speaker 1: So as we were talking about before, you know ample, right, 447 00:29:36,880 --> 00:29:39,480 Speaker 1: in an aggregate sense, you would definitely say that bank 448 00:29:39,560 --> 00:29:44,160 Speaker 1: reserves are ample, But in a relative sense, in terms 449 00:29:44,200 --> 00:29:48,000 Speaker 1: of the distribution between large and small banks, it's not 450 00:29:48,480 --> 00:29:53,680 Speaker 1: clear that there's as much ampleness of bank reserves than 451 00:29:53,760 --> 00:29:57,360 Speaker 1: the numbers suggest. I just have one more question, which is, 452 00:29:57,800 --> 00:30:00,480 Speaker 1: you know, in the interests of I guess, both financial 453 00:30:00,480 --> 00:30:05,320 Speaker 1: stability and the effective transmission of monetary policy and fighting inflation, 454 00:30:05,680 --> 00:30:09,080 Speaker 1: should we all be going out and finding the best 455 00:30:09,120 --> 00:30:11,920 Speaker 1: deposit deals for ourselves. Should we all be moving our 456 00:30:11,960 --> 00:30:16,440 Speaker 1: money around? Is this helpful? Yeah? I mean everybody wants 457 00:30:16,440 --> 00:30:21,920 Speaker 1: to earn more money, so I would expect that people 458 00:30:22,000 --> 00:30:25,960 Speaker 1: would migrate their balances to hire yielding products. And the 459 00:30:25,960 --> 00:30:29,120 Speaker 1: closest substitute for bank deposit at this point is a 460 00:30:29,120 --> 00:30:34,080 Speaker 1: money market fund. And the curious thing is that money 461 00:30:34,080 --> 00:30:39,280 Speaker 1: market funds are not experiencing inflows, right, So money market 462 00:30:39,320 --> 00:30:44,440 Speaker 1: fund balances are paying about four percent or more in 463 00:30:44,560 --> 00:30:47,240 Speaker 1: terms of seven day yields, right, So you can definitely 464 00:30:47,240 --> 00:30:50,280 Speaker 1: earn more than the twenty three basis points you mentioned 465 00:30:50,640 --> 00:30:55,560 Speaker 1: right in a government only money market fund. And what's puzzling, 466 00:30:56,320 --> 00:30:59,440 Speaker 1: at least to me, is that, given that difference between 467 00:30:59,480 --> 00:31:01,880 Speaker 1: what you can earn a money market fund and a 468 00:31:01,960 --> 00:31:07,040 Speaker 1: bank deposit, right, why aren't money fund balances going up? Right? 469 00:31:07,120 --> 00:31:09,960 Speaker 1: Why aren't they significantly higher than they are right now? 470 00:31:11,040 --> 00:31:15,720 Speaker 1: And I suspect right that there are two reasons for this, right. 471 00:31:16,600 --> 00:31:19,400 Speaker 1: One is that on the retail side, we are seeing 472 00:31:19,440 --> 00:31:22,840 Speaker 1: some level of interest rate sensitivity, but people are moving 473 00:31:22,840 --> 00:31:26,880 Speaker 1: into higher yielding products than government only money market funds. 474 00:31:27,160 --> 00:31:29,160 Speaker 1: And in fact, what they're doing is they're moving into 475 00:31:29,480 --> 00:31:32,800 Speaker 1: prime money market funds. And the prime money market funds 476 00:31:33,240 --> 00:31:36,880 Speaker 1: won't go into this sort of the details, but they 477 00:31:36,920 --> 00:31:42,640 Speaker 1: buy commercial paper and other credit instruments right, all short maturity, 478 00:31:42,680 --> 00:31:44,680 Speaker 1: but they earn a little bit more than a government 479 00:31:44,680 --> 00:31:47,800 Speaker 1: only money market fund. And so if you're an interest 480 00:31:47,880 --> 00:31:52,720 Speaker 1: rate since it's investor right, and you're looking for higher yields, 481 00:31:52,720 --> 00:31:54,360 Speaker 1: you're going to migrate into the prime funds. And what 482 00:31:54,400 --> 00:31:56,760 Speaker 1: we've seen is prime fund balances have gone up sharply 483 00:31:57,000 --> 00:32:00,640 Speaker 1: in the last at least since lift off. When you 484 00:32:00,680 --> 00:32:04,600 Speaker 1: look at institutional investors, I think what institutional investors are 485 00:32:04,600 --> 00:32:07,120 Speaker 1: doing is they're buying bills, right, They're looking at bill 486 00:32:07,200 --> 00:32:10,120 Speaker 1: yields and saying bill yields are significantly higher than what 487 00:32:10,400 --> 00:32:13,120 Speaker 1: I can get on a money market fund, right, And 488 00:32:13,160 --> 00:32:15,560 Speaker 1: so I'm going to buy bills rather than invest in 489 00:32:15,640 --> 00:32:19,160 Speaker 1: money market fund because I can earn higher yews. What 490 00:32:19,320 --> 00:32:22,000 Speaker 1: I do not think is true is that I do 491 00:32:22,080 --> 00:32:27,360 Speaker 1: not believe that multiple years of quantitative easing have somehow 492 00:32:27,480 --> 00:32:31,960 Speaker 1: suppressed interest rate sensitivity among investors so that they no 493 00:32:32,040 --> 00:32:35,840 Speaker 1: longer care about four percent yields in money market funds 494 00:32:35,840 --> 00:32:37,760 Speaker 1: and it will be happy to earn twenty three basis 495 00:32:37,800 --> 00:32:41,480 Speaker 1: points in a bank deposit and not move I suspect. 496 00:32:41,760 --> 00:32:43,960 Speaker 1: And we are seeing this as money is coming out 497 00:32:44,000 --> 00:32:48,800 Speaker 1: of deposits, but it's migrating into higher yielding stuff and 498 00:32:48,920 --> 00:32:54,880 Speaker 1: not necessarily governmental in money market funds at least for now. Okay, Joe, 499 00:32:55,000 --> 00:32:58,720 Speaker 1: that was a fantastic explanation of how this all works. 500 00:32:58,720 --> 00:33:00,880 Speaker 1: Thank you so much for coming on all lots. You 501 00:33:01,080 --> 00:33:03,320 Speaker 1: fulfilled a long held dream of mine to get you 502 00:33:03,360 --> 00:33:05,880 Speaker 1: on the show. So thank you so much. All right, 503 00:33:05,920 --> 00:33:21,360 Speaker 1: thank you. By now, so, Joe, I thought that was 504 00:33:21,920 --> 00:33:25,040 Speaker 1: not just an interesting walk through the question at hand, 505 00:33:25,080 --> 00:33:27,640 Speaker 1: which is why aren't banks raising deposit rates? But also 506 00:33:27,720 --> 00:33:31,360 Speaker 1: kind of a really nice overview of how the monetary 507 00:33:31,480 --> 00:33:35,520 Speaker 1: policy interaction with the financial system has actually changed since 508 00:33:36,080 --> 00:33:38,280 Speaker 1: the two thousand and eight financial crisis. No, I mean 509 00:33:38,320 --> 00:33:41,160 Speaker 1: I was like really interesting, like that sort of headline question, 510 00:33:41,240 --> 00:33:43,280 Speaker 1: why why don't they raise rates? But also like I 511 00:33:43,400 --> 00:33:45,400 Speaker 1: was just sort of curious, like how do banks work? 512 00:33:46,080 --> 00:33:48,520 Speaker 1: You know, like what is seriously like what is the 513 00:33:48,640 --> 00:33:52,320 Speaker 1: role of deposits? No, now you're like, why isn't more 514 00:33:52,320 --> 00:33:55,200 Speaker 1: money flowing into government money market funds? Well? Yeah, I 515 00:33:55,200 --> 00:33:58,120 Speaker 1: mean seriously, but I mean all these things like over time, 516 00:33:58,200 --> 00:34:01,440 Speaker 1: like the policy changes that were made, you know, post grant, 517 00:34:01,800 --> 00:34:05,040 Speaker 1: post grade financial crisis that sort of put this premium 518 00:34:05,280 --> 00:34:08,520 Speaker 1: on deposits. You know, there's this stat that I have 519 00:34:08,680 --> 00:34:11,600 Speaker 1: seen and heard that like you're more likely to get 520 00:34:11,600 --> 00:34:15,240 Speaker 1: divorced than to ever change banks in your life. Yeah, 521 00:34:15,320 --> 00:34:17,520 Speaker 1: and so what I've heard, and I don't know if 522 00:34:17,520 --> 00:34:20,320 Speaker 1: it's true. Other you know who knows is our frequent 523 00:34:20,320 --> 00:34:22,759 Speaker 1: guest Patrick McKenzie has written about this. But why do 524 00:34:22,840 --> 00:34:25,799 Speaker 1: banks still have these physical Yeah? Because if they could 525 00:34:25,840 --> 00:34:27,480 Speaker 1: just I've heard that if they could just get like 526 00:34:27,520 --> 00:34:29,719 Speaker 1: a few people in the door you're worth so much 527 00:34:29,760 --> 00:34:31,840 Speaker 1: money over the course of the lifetime as a customer, 528 00:34:32,200 --> 00:34:35,160 Speaker 1: even though no one goes into those retail things. And 529 00:34:35,200 --> 00:34:37,120 Speaker 1: it's partly because no one never really switched at banks. 530 00:34:37,200 --> 00:34:41,160 Speaker 1: I think it is like a phenomenally sticky business model. 531 00:34:41,200 --> 00:34:44,200 Speaker 1: And I remember when I went to university in London. 532 00:34:44,440 --> 00:34:48,520 Speaker 1: I remember banks pitching these student programs, and if I 533 00:34:48,600 --> 00:34:50,960 Speaker 1: was still in London, I think I would still be 534 00:34:51,080 --> 00:34:53,800 Speaker 1: with the bank that like recruited me when I was 535 00:34:53,880 --> 00:34:56,640 Speaker 1: a college student. It's weird because I think, like intuitively, 536 00:34:56,640 --> 00:34:59,440 Speaker 1: you'd think with the Internet that look that moving money 537 00:34:59,440 --> 00:35:02,160 Speaker 1: from one of to another would be more liquid, yeah, 538 00:35:02,200 --> 00:35:05,080 Speaker 1: more easy, But somehow it seems like the opposite, because 539 00:35:05,080 --> 00:35:07,680 Speaker 1: you have all these apps and you have passwords, and 540 00:35:07,760 --> 00:35:10,239 Speaker 1: you have bills connected to your account, and so I 541 00:35:10,280 --> 00:35:11,839 Speaker 1: feel like I'm going to change your banks, Like that's 542 00:35:11,840 --> 00:35:14,080 Speaker 1: so many things to switch, it's just not worth it. 543 00:35:14,120 --> 00:35:17,840 Speaker 1: The network effect, Yeah, the same thing that dollar dominance 544 00:35:17,880 --> 00:35:21,480 Speaker 1: and Twitter dominance and Facebook dominance. Even though it's all 545 00:35:21,560 --> 00:35:24,000 Speaker 1: it's it's network effects all the way down. So the 546 00:35:24,040 --> 00:35:26,880 Speaker 1: two other things I thought were really interesting, just very quickly, 547 00:35:27,000 --> 00:35:30,600 Speaker 1: are that idea of reserve scarcity, and this is something 548 00:35:30,719 --> 00:35:33,480 Speaker 1: that came up with Bill Nelson when we were talking 549 00:35:33,520 --> 00:35:36,680 Speaker 1: about why have we seen this tick up in discount 550 00:35:36,760 --> 00:35:39,759 Speaker 1: lending to the banks. This idea that even though we 551 00:35:39,760 --> 00:35:42,040 Speaker 1: still have a lot of reserves and liquidity in the system, 552 00:35:42,120 --> 00:35:45,839 Speaker 1: they are not evenly distributed. Yeah. And then secondly this 553 00:35:45,920 --> 00:35:50,520 Speaker 1: idea that as quantitative tightening really kicks into gear, you 554 00:35:50,640 --> 00:35:54,000 Speaker 1: might start to get this process where deposit rates start 555 00:35:54,040 --> 00:35:57,160 Speaker 1: going higher and there is that substitution effect. Yeah, and 556 00:35:57,280 --> 00:36:00,360 Speaker 1: the fact that like you can't actually or you're the 557 00:36:01,200 --> 00:36:05,480 Speaker 1: you're only gonna go get so far taking a crude 558 00:36:05,520 --> 00:36:09,040 Speaker 1: measure of cash to total assets. Because of this very 559 00:36:09,080 --> 00:36:12,279 Speaker 1: difference and model between the big domestic banks and the 560 00:36:12,360 --> 00:36:14,719 Speaker 1: small banks and how they make the smaller banks might 561 00:36:14,800 --> 00:36:18,920 Speaker 1: run into liquidity scarcity a lot faster than the larger banks. 562 00:36:19,120 --> 00:36:22,640 Speaker 1: So you know, can see why analysts like Joe are 563 00:36:22,719 --> 00:36:25,680 Speaker 1: in demand because it's not as simple as just sort 564 00:36:25,719 --> 00:36:29,520 Speaker 1: of like looking at one number and dividing by another number. Totally, 565 00:36:30,000 --> 00:36:33,600 Speaker 1: banking is not a monolith. Also, everyone should go deposit 566 00:36:33,719 --> 00:36:37,160 Speaker 1: rate shopping in order to aimate more money and improve 567 00:36:37,239 --> 00:36:40,480 Speaker 1: the monetary policy mechanism worse inflation. Will all be getting 568 00:36:40,480 --> 00:36:42,960 Speaker 1: more income and more income, the last thing that we 569 00:36:42,960 --> 00:36:45,880 Speaker 1: all need right now. If I had, if I was 570 00:36:45,880 --> 00:36:49,000 Speaker 1: a fintech, you guys are, and I'd be spending that money. Okay, 571 00:36:49,000 --> 00:36:52,640 Speaker 1: we're back to the circular nature of like prices going 572 00:36:52,680 --> 00:36:55,080 Speaker 1: down and then increasing prices, and then we never get 573 00:36:55,080 --> 00:36:56,920 Speaker 1: out of it. Shall we leave it there? Let's leave 574 00:36:56,920 --> 00:36:59,440 Speaker 1: it there. This has been another episode of the All 575 00:36:59,480 --> 00:37:02,160 Speaker 1: Thoughts Past. I'm Tracy Alloway. You can follow me on 576 00:37:02,200 --> 00:37:04,799 Speaker 1: Twitter at Tracy Alloway and I'm Joe Why isn't thall? 577 00:37:04,840 --> 00:37:07,680 Speaker 1: You could follow me on Twitter at the Stalwart, follow 578 00:37:07,719 --> 00:37:11,760 Speaker 1: our producers Kerman Rodriguez at Kerman Ermine and Dash Bennett 579 00:37:11,800 --> 00:37:14,719 Speaker 1: at dashbot, and check out all of our podcasts here 580 00:37:14,719 --> 00:37:17,960 Speaker 1: at Bloomberg into the handle at podcasts, and for more 581 00:37:18,000 --> 00:37:21,080 Speaker 1: Odd Lots content, go to Bloomberg dot com slash odd Lots, 582 00:37:21,320 --> 00:37:23,800 Speaker 1: where we blog, we post transcripts. We have a weekly 583 00:37:23,880 --> 00:37:26,879 Speaker 1: newsletter comes out every Friday. Go there and sign up. 584 00:37:27,160 --> 00:37:28,000 Speaker 1: Thanks for listening.