Why Interest Rates on Savings Accounts Are Still So Low

Deposit Dynamics

Banks are in a constant balancing act when it comes to deposit competition. Joe Abate explains that banks must weigh the interest returns from their assets against the costs of raising deposits or wholesale funding. This dynamic is influenced by monetary policy, which affects how banks decide to fund their assets, whether through deposits or other means 1.

The primary driver is going to be asset growth on the bank side. That determines how competitive banks have to be in deposits.

--- Joe Abate

Over the years, retail deposits have gained importance due to regulatory changes, shifting banks away from wholesale funding. This shift has led to a more deposit-reliant environment, reminiscent of pre-1980s banking practices 2.

   

Bank Competition

Small banks face unique challenges in competing with larger institutions for deposits. Joe Abate highlights that smaller banks often experience more pressure on deposit rates due to uneven distribution of reserves and liquidity in the system 3. Despite these challenges, small banks argue that local knowledge and personalized service offer competitive advantages.

Small banks would argue that there are advantages to banking locally, and that the advantages to banking locally is your mortgage lender knows the market.

--- Joe Abate

As quantitative tightening progresses, deposit rates may rise, but smaller banks might encounter liquidity scarcity faster than their larger counterparts, complicating their competitive stance 4.