One would think that if a bank offers very low deposit rates, deposits would fall. In today's world that's not the case. In an interview by FORTUNE Magazine, Wells Fargo CEO, John Stumpf, described the high deposit growth that Wells Fargo has been experiencing:
we think there's something between $1.5 trillion and $2 trillion on businesses' and consumers' balance sheets that is sitting in our vaults. I've never seen it like this before. I've never seen the deposit growth the way we have it, and it's not because the yields are so high. It's security.
As Stumpf mentioned, the deposit growth isn't due to high rates. I took a look at Wells Fargo's rates. Its High Yield Savings Account pays a top rate of only 0.15%, and that requires a $25K balance and a PMA Package relationship. The highest CD rate is only 0.80%. This is a special 58-month CD.
Not only are deposits up, but loans continue to be down as compared to deposits. That's another thing depressing rates. According to Stumpf:
We typically run our company with about $1 of loans for every $1 of deposits. Today we're in the 80% range -- we're about $200 billion short of loans.
Stumpf described why he thinks they are short of loans:
there's a cautiousness because people are unsure about tax policy, about what's going on with the fiscal cliff, regulation, and a bunch of other things.
I think this uncertainty also applies on the deposit side. The Fed Chairman Ben Bernanke admitted early this year that "part of the reason for the [zero interest rate] policy is to move people away from very conservative liquid positions slightly more into riskier positions." How much of the stock market gains have been due to the Fed's policy? Is there a stock market bubble that may be on the verge of popping if things like the fiscal cliff aren't resolved? Earning zero percent is still much better than a negative 50 percent return like what we saw in 2008 and 2009. There are similar worries about a bond bubble and commodity bubbles.
Another question is why so many people are keeping their money at Wells Fargo and other big banks rather than at internet banks and credit unions where they can receive higher interest rates. In my opinion, the low interest rate environment makes interest rates less important. In this kind of environment, there's not much advantage of moving your money from Wells Fargo to an internet bank. By moving your money, you should be able to get at least an extra percentage point in your deposit rates. But that's only $100 for a $10,000 deposit over one year. When internet banks were paying 5% rates, moving your money could result in an extra 4 percentage points in your deposit rates. That's $400 for each $10,000 of deposits over one year. In summary, a low interest rate environment provides less incentives for rate chasing.
Have you kept more money at large banks like Wells Fargo in the last few years? Has it been due to safety issues? Or has it been due to diminishing returns of rate chasing?