“Bank Robbers”

Kerr Financial Group

Kildare Asset Mgt.

Jeffrey J. Kerr, CFA

Newsletter

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April 15, 2024 - DJIA = 37,983 – S&P 500 = 5,123 – Nasdaq = 16,175

The banking system has a notoriety that rivals thieves and convicts.? Of course, it is well earned.? Josiah Stamp, an English industrialist and banker in the early 1900’s, described banking as being “conceived in iniquity and born in sin”.?

Recent developments show that banks continue to cheat their customers.? In this case, the thievery is not disguised or hidden.? It is out in the open and, strangely, the depositor (customer) agrees to be shortchanged. ??

The theft that is taking place is being inflicted on customers of banks in the form of lower rates on deposits and CD’s.? These rates are materially lower than what is available in the marketplace.? ???

As an illustration, below are two charts showing what is going on.? This data separates banks into the four largest (Citigroup, Bank of America, JP Morgan, Wells Fargo) and the rest of the industry.? As can be seen, the big four are, on average, paying almost 0% on savings accounts and averaging around 1% for a one-year certificate of deposit.? The rest of the industry is offering an average of 0.4% on savings and around 2.5% for a one-year CD.? ??

Compare these rates to those easily attainable in the marketplace.? For example, Fidelity has a money market fund that is currently at 4.6% annualized rate.? This has the same liquidity and safety as the savings account.? There are widespread offerings for one-year certificate of deposits that are over 5% annualized.? ??

Depositors settling for the lower rates on either savings or CD’s are giving thousands of dollars to the banks.? For example, someone with $100,000 at an institution offering 0.4% will earn $400 per year.? That same $100,000 will receive around $4,600 in a higher yielding money market.? The depositor gives the bank $4,200 for their inaction.? ??

Looking at CD’s, $100,000 earns $2,500 at the one-year rate of the average bank.? A little easy research would double that return (over $5,000) for the same time and risk.? A logical person would choose to put more money in their own pocket rather than give it to the bank.?

Of course, these numbers get uglier when the returns are adjusted for inflation.? If recent CPI numbers (around 3.5%) are applied to the calculation, the savings account and one-year CD both lose as measured against your purchasing power.? A double whammy by the banks and inflation.? ??

While this seems blatantly ridiculous, last year’s bank failures contributed to the irrational decisions.? When Silicon Valley Bank failed, deposits quickly fled from smaller banks as depositors worried who was going to fail next.? The mega-institutions were thought to be islands of safety.? The result is that these banks have so many deposits they don’t need to attract more and, consequently, don’t need to pay competitive rates on the accounts they have.?

While investors thought they were acting prudently, the fact is that they were doing the opposite.? The limit of FDIC insurance on deposits is $250,000.? In other words, any person or entity that has over $250,000 at a banking institution (this includes all accounts), the amount over that limit is not covered under current regulations.?

In the banking turmoil of 2023, the FDIC covered all deposits even those above the $250,000 limit.? This might be the new norm or de facto regulation.? However, there is a risk that at some point the regulatory limits are observed and customers take the losses.?

This is not a prediction of systemic banking problems and that the FDIC insurance limits are tested.? Hopefully, those developments can be avoided.? A further wish is that this educates the reader, and they make the proper decision for their situation.? All things being equal, maximizing the return on your assets is a rational goal.? Please contact us with any questions or if further help is needed.? ??