Dedicated to Deposits: Deals, Data, and Discussion

How Banks are Being Squeezed by Interest Rates

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With short-term rates being higher than many long-term rates, profits at banks are being squeezed. This Washington Post article has an overview of this issue. According to the article, it's affecting the smaller banks more since they tend to have less diversified sources of income. Some banks have been loosening up their credit standards to compete. This may increase the trend that banks are already seeing in which borrowers are failing to make payments. You have to wonder if we'll see more bank failures in the near future. Just remember to stay within the FDIC limits for your deposits. Please refer to my Facts about FDIC and NCUA post for more info.

Thanks to the reader who emailed me this article.

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Comments
6 comments.
Comment #1 by SVG (anonymous) posted on
SVG
Banking Guy,

>>Just remember to stay within the FDIC limits for your deposits.<<

This is a very sound advice. I agree - whole heartedly.

Americans are now used to carrying debt - Mortgage / Auto / Credit Card. It is hard for this sort of economy to continue smoothly indefinitely. There are bound to be some bumps in the road - a few quite severe. When we hit that, the last line of defence for most American investors who don't go beyond Savings / Money-Market / CDs / Certificates is FDIC/NCUA.

At the extreme, if FDIC/NCUA were to face multiple failing financial institutes, then I suspect only way they can full-fill their obligation would be to make US Treasury 'print' money and use it to settle the insurance. I repeat this is extreme case.

But then there are alternate ways to protect against (even benefit from) failing currency as well viz. 1) Buy Bullion 2) Buy Euro 3) Short Dollar ...

- SVG

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Comment #2 by SVG (anonymous) posted on
SVG
Readers,

The Washington Post Article refers to the following ===>

>>But over the past few years, the spread has narrowed, partly as a result of action by the Federal Reserve. Worse for the banks, during the second half of last year, prevailing short-term rates exceeded long-term rates through a phenomenon that econowonks refer to as an "inverted yield curve," squeezing the institutions further.<<

The term inverted yield curve perhaps sounds a bit too technical, but it is nothing more than difference (or division) of short-term yield and long-term yield. When this value is plotted over time the shape it makes is that of a line going down. Hence the term inverted yield curve. Several folks (yes ... even Mr Bernanke) pay attention to this.

- SVG

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Comment #3 by Banking Guy (anonymous) posted on
Banking Guy
SVG, thanks for explaining the inverted yield curve. That article has a good graph which shows the inversion over the last several months.

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Comment #4 by Anonymous posted on
Anonymous
Makes you wonder how long Penfed can pay out more for a 5-yr CD than they're taking in on a 5-yr car loan.

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Comment #5 by Anonymous posted on
Anonymous
Banking guy, how safe do you think it is to use POD beneficiaries for extra FDIC / NCUA insurance? Do you think the POD's will really be treated the same in the event of a failure?

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Comment #6 by Banking Guy (anonymous) posted on
Banking Guy
About using PODs to extend FDIC/NCUA coverage, please refer to this previous post. In the comments I discuss about a bank failure and the issues regarding deposits over $100K.

1