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Banks don’t want your money right now

Everyone’s saving money, but no one is earning much interest.

A broken piggy bank with unbroken ones to either side of it.
Your savings account isn’t doing much for you at the moment.
AlexSecret/Getty Images

US interest rates and inflation are on the rise again, which means Americans can expect to pay higher rates for mortgages, auto loans, and credit cards. But don’t expect it to lead to higher interest on your savings account anytime soon.

Banks don’t want your money. That’s why they’re offering such low rates.

Today, the average US savings account pays 0.06 percent interest annually. Put another way, in one year a saver will earn just $6 in interest on $10,000 in deposits. Even many of the top online “high-yield savings accounts” in the US pay a negligible 0.5 percent interest annually. And the average one-year certificate of deposit (CD), typically one of the highest-yielding savings vehicles, pays 0.15 percent.

While savings accounts and CD yields are at historic lows, inflation this year is expected to increase at the fastest pace since 1991, eroding consumers’ purchasing power and reducing the value of their dollars. Normally, high inflation leads to higher interest rates that translate to higher rates on savings accounts as banks seek out deposits. But that’s not the case in 2021.

In July, Americans who put their money in savings accounts were hit with the most negative real average savings rate in US history: -5.34 percent.

At that rate, $10,000 deposited in a savings account would be worth only $9,460 in equivalent dollars at the end of a one-year period. In essence, the saver loses $540 in buying power to earn $6 in interest.

Yet, Americans are pouring money into savings accounts at a historic rate. The US personal savings rate in 2020 rose to 13.7 percent, the highest in the 62-year history of the measure; in 2021, it has so far averaged near that rate.

The buildup in savings is the byproduct of a confluence of events related to the Covid-19 pandemic: a reduced ability to spend on service-related purchases such as dining out and travel, government support like stimulus checks and enhanced unemployment benefits, and fear that the February 2020 to April 2020 recession would cause financial instability and wide-ranging job losses. It was also a call to action for many, as more than half (51 percent) of Americans have less than three months’ worth of emergency savings.

However, financial professionals say the call has now gone too far, especially given the paltry payoff for those who save.

“We are seeing clients with too much cash in their portfolios, and that could impact their purchasing power,” says Michael Briese, a senior vice president and private client adviser at J.P. Morgan Wealth Management. “Think about it this way: If the economy grows and prices rise but your savings stay the same, what you can buy with that money shrinks in the long term.”

Banks have been inundated with deposits from consumers since the start of the pandemic. Cash assets at commercial banks totaled $4.7 trillion as of September 15. That’s more than double the $1.8 trillion of cash held at such banks in February 2020.

The trend is a reversal of the one that had been in place from 2014 to 2019 when Americans — seemingly fed up with near-zero returns on their savings accounts — started pulling money out of commercial banks. Between October 2014 and October 2019, commercial banks’ cash assets declined from just under $3 trillion to around $1.7 trillion.

“All this money has been deposited but banks can’t find good loans to make,” Gary Zimmerman, founder and CEO of fintech savings vehicle MaxMyInterest, says. “There’s been a big slowdown in lending, and because banks have more deposits than they can find a home for, their only option is to try to lower their interest rates to get you to go away. Large lending institutions are actively hoping you’ll withdraw your money.”

Data from the Federal Reserve show that as deposits have grown, loans have fallen, in large part because banks are also socking away money in the form of securities guaranteed by the federal government. And while mortgage lending has largely held up, thanks to the booming US real estate market, commercial and industrial loans have been in freefall since May 2020, declining by nearly 20 percent.

The share of total assets devoted to loans at the 25 biggest US banks fell to the lowest level in the nearly 36-year history of the Fed’s weekly data this year. The ratio of loans to deposits at US banks also fell to its lowest level on record in the second quarter, according to S&P Global Market Intelligence’s database, which dates back to 2003.

In theory, banks need deposits to be able to make loans, which are their primary revenue driver. But in reality, the Federal Reserve — the all-powerful central bank of the United States — pushed the reserve requirement ratio (RRR) to zero percent in March 2020.

The RRR is the ratio of actual cash banks must hold in relation to how much money they lend. If the reserve requirement ratio is 10 percent, banks that want to lend $100,000 must hold $10,000 in cash. With the ratio at zero, commercial banks have the ability to lend much more money without needing a corresponding increase in deposits.

In addition to taking RRR to zero percent, the Fed also has been flooding markets with cash through its quantitative easing (QE) program since March 2020, pushing $120 billion into the economy every single month. That gives banks further access to capital and even less reason to incentivize consumers to save or make deposits.

Making it unattractive to save is a feature, not a bug, of the Fed’s policy. Low interest rates and abundant capital are intended to push consumers to buy instead of save or to take additional risk and do things like start a business or take out a second mortgage on a home in order to spend more money.

The goal is that this money gets out into the economy and encourages businesses to hire more workers and pay them more money, furthering a virtuous circle of spending that benefits everyone.

But some argue that the Fed’s extraordinary support since the start of the pandemic has not helped the economy as much as it has fueled asset bubbles in stocks, real estate and even commodities as more investors borrow money that they use to speculate in these markets.

The effects can be seen in the rise of not just the overall stock market and housing prices, but in cryptocurrencies (hailed as a savings asset that the Fed can’t manipulate), the frenzy in “meme stocks” like GameStop and AMC, and in the skyrocketing price of trading cards, art and things like non-fungible tokens, or NFTs.

Investors are largely just following the lead of US companies, which borrowed a record $1.3 trillion last year and held a total of $13.5 trillion in debt for the 2020 financial year.

Large companies are able to eschew banks and traditional lending by borrowing money in public debt markets through bond issues, meaning they draw money from investors as loans that are paid back with interest over time.

The Fed helps here as well. By lowering US interest rates and buying U.S. government bonds through QE, the average amount companies have to pay in interest is near the lowest it has ever been. That’s especially important for risky companies with “junk” credit ratings that would otherwise find it very expensive to borrow.

In light of this new environment, some wealth managers like Douglas Boneparth, president of Bone Fide Wealth, are encouraging their clients to adopt a similar strategy to corporations.

Boneparth, who works primarily with older millennials, typically advises his clients to hold nine to 12 months of living expenses in cash. But he is now suggesting that some clients who have stock portfolios or own their home open up lines of credit backed by those assets instead of holding all that cash.

“What it really boils down to is [that] having too much money out of the market is a missed opportunity to compound your wealth,” Boneparth says.

Because it pays so little to save and costs so little to borrow, Boneparth advises some clients to have six months of living expenses in cash and the equivalent amount available through either a home equity line of credit or a margin loan from a brokerage firm.

“You’re playing rates to your advantage. Rates are low, money is super cheap right now,” he says. “[However], the advice isn’t to go leverage yourself or take on a bunch of debt. If you’re disciplined enough to utilize credit responsibly, here is a way it can prove to be very powerful.”

More clients are looking to take advantage of such opportunities, Boneparth says.

That’s not surprising to Zimmerman, who created MaxMyInterest in response to the anemic yields offered on savings accounts at big banks. The company aims to help consumers holding high amounts of cash automatically find the best available interest rate.

The combination of the Fed’s massive intervention into markets and the government’s big spending on stimulus and recovery bills “has put so much artificial money into banks,” Zimmerman says.

“People are taking on more risks because they’re saying, ‘If the bank doesn’t want my money, I’ve got to find somewhere else to put it.’”