Friday, February 10, 2012

Prospects for retail deposits

We're now on year 4 of ZIRP, and it looks like things are going to be like this for awhile to come.  I'm not on the funding desk of a bank, I'm just wondering out loud.  But how could this environment be affecting the medium and long-term plans of commercial banks with regards their deposit base?

This is an environment engineered by the Fed to discourage saving and to encourage borrowing/lending. But the people's persistence to save and delever continues unabated. So banks have been ending up with a lot of deposits, which  are a cost base for them (both in terms of service and in interest) while good lending opportunities continue to be outnumbered by the amount of funds available to them.  Ordinary savers continue to leave their savings in cash deposits rather than invest them in businesses or other productive endeavours (Many are still afraid of lagging demand). Meanwhile, the Fed further exacerbates the situation by swapping their treasury holdings into even more idle cash.

The yield curve has been flattening over a longer maturity period, and hence, banks have no problem securing funds whenever they need them for loan settlements.  And for shorter periods, they could borrow them for zero or close to zero cost. So what the hell do they still need retail depositors for?

Retail depositors are costly to maintain. You need to have branches, costing money to rent and maintain. You need to have staff ready to serve their needs,  and many of these depositors could be very needy.   Rising deposits cost more to insure with the FDIC.  To the extent deposits are made in physical currency, there are further costs to safeguard, keep, and transport this deposit base. 

Every retail client is valuable to a bank to the extent that he churns his deposits in various transactions, where the bank earns its fees.  Savers who simply leave money with the bank unused and unturned are a cost to the bank. Some banks have actually started charging fees to large deposits last year, both in an effort to make back what it costs them to take the deposits, and get this….to drive away the depositors!  As some bankers in the article have said, this has never happened before. 

Now as I said, retail branches can be profit centres, to the extent that they churn depositors' money, by encouraging more fee-based transactions, or encouraging savers to put them in bank-sponsored asset management vehicles. Branches that are able to do this in economical numbers can continue to justify their existence. What about those that simply have more deposits than they have transactions, and are unable to change the course of things? Many of them will probably close, pretty soon or in the coming months, if either: rates continue at ZIRP, or bank lending doesn't pick up to pay for the cost of the deposits.

If neither of those happen soon enough, is your neighbourhood bank branch at risk of closure?


agriculture investments said...

It looks the FED will keep rates where they are through at least mid-2013. BOE likely will as well. The point is, in a balance sheet recession where deleveraging is the priority, peoples' string inclinations will still be for saving over borrowing or risk assets.

Rogue Economist said...

Yes, and this needs to be drilled again and again to monetarists who believe monetary easing is what will turn things around.

agriculture investments said...

Well RE, you think people would learn by now after all of these QEs seem to be doing nothing but giving risk assets a temporary sugar high. You seem to get it, Colin over at the Pragmatic Capitalist blog gets it, Richard Koo of Nomura who coined the term 'balance sheet recession gets it', but central bankers seem not too!

MrIlir said...

The Rogue Economist should appreciate another economist that went rogue. Alex Gheg was a PhD econ student and then he discovered the fundamental flaw of neoclassical consumer theory. It has been covered up until now. Luckily, you can learn what's really wrong and a simple equation that ties together quantity, quality, variety and convenience. Imagine a practical scale for technology.