The Federal Reserve has been raising benchmark borrowing rates at the fastest pace in decades, but the interest rate paid out to millions of people with bank accounts is still stuck at almost zero. According to data from Bankrate, the average interest rate on savings accounts is just 0.23%. So what’s going on? Why have many banks so far avoided raising what they pay out to depositors even as the Fed hikes, and will that eventually change? What does it mean for the financial system and also econo
(Bloomberg) — The Federal Reserve has been raising benchmark borrowing rates at the fastest pace in decades, but the interest rate paid out to millions of people with bank accounts is still stuck at almost zero. According to data from Bankrate, the average interest rate on savings accounts is just 0.23%. So what’s going on? Why have many banks so far avoided raising what they pay out to depositors even as the Fed hikes, and will that eventually change? What does it mean for the financial system and also economic policy given that higher rates are, in theory, supposed to encourage less spending and more saving in order to curb higher inflation? On this episode, we dig deep into the making of bank deposit rates with Barclays strategist Joe Abate. This transcript has been lightly edited for clarity.
Key insights from the pod:Why aren’t bank rates going up? — 4:38Why has the deposit beta declined recently? — 8:16The hassle of switching bank accounts — 10:31Deposit rates as a function of asset growth — 13:52The role of deposits in the financial system — 16:49Differences between big and small banks — 20:39What does quantitative tightening mean for rates? — 24:07The uneven distribution of reserves — 27:39Where are people putting there money to get more yield? — 29:53—
Tracy: (00:10)Hello and welcome to another episode of the Odd Lots podcast. I’m Tracy Alloway.Joe: (00:14)And I’m Joe Weisenthal.Tracy: (00:15)Joe, do you know what the average interest rate paid on US bank accounts currently is?Joe: (00:21)Only because we just looked it up and I couldn’t believe it. I actually thought you were wrong about a decimal, when you told me the number, that you must be a decimal point off.Tracy: (00:30)Yeah. It is surprising. So the average annual percentage yield, or APY, according to Bankrate is 0.23%. And this at a time when, as you know, benchmark interest rates are at like 4.5%, 4.75%.Joe: (00:47)I would’ve guessed that maybe they were like 1.5%, 2%, which is still pretty low, right? So if you could get four and a half percent as a bank on overnight rates, then it’s like, okay, maybe your depositors’ checking account, whatever, get a couple percent, that’s still spread, but they’re still basically paying you almost nothing. You just want to like hold your cash there, which is pretty staggering.Tracy: (01:10)Almost nothing, absolutely. So this is a question that comes up a lot and it’s obviously frustrating if you are a saver. You know, everyone wants to be a rentier to some extent, right? We all want to make money off our money.Joe: (01:23)Have your money work for you!Tracy: (01:23)Exactly. That is the dream. So if the banks aren’t passing through those interest rate hikes, it’s naturally frustrating for retail depositors. However, it’s also kind of frustrating from an economic/macroeconomic policy perspective because if you think about what monetary policy is supposed to do, it is supposed to work through changes in interest rates, which are supposed to ripple out from the central bank into the rest of the economy.Joe: (01:50)Right, intuitively, one channel that you could imagine that rate hikes work through is, ‘oh, look, suddenly I’m getting a lot more money to save. Maybe at the margin I’ll save a little more because I’m getting paid to spend a little less, create sort of decrease pressure in the economy.’ I don’t know if anyone ever really thinks that way. It’s like, ‘oh, I’m not going to buy like this watch, or I’m not going to buy these like, concert tickets because I could get, you know, 3%, having left this money in the bank.’ Nonetheless…Tracy: (02:21)Well, you can get 0.23 percent.Joe: (02:23)Yeah, I’m definitely going to keep spending in that case. And of course there are ways to get more yield and you can lock it up and if you wanted to, you could go out and like buy a one year…Tracy: (02:34)Certificate of deposit or something.Joe: (02:35)I’m not going to do that. It’s so much work.Tracy: (02:38)Okay. Well this is clearly something that we need to talk about, both in the context of monetary policy and broader economics. And I am very pleased to say that we really do have the perfect guest on this topic. We’re going to be speaking with Joseph ‘Joe’ Abate. He is a money market strategist over at Barclays, also does fixed income research. I’ve been a fan of his work for a very, very long time. Yes. And have been meaning to get him on Odd Lots for just as long. So I’m very pleased to have him here now to explain this discrepancy to us. Joe, welcome to the show.Joseph Abate: (03:10)Thank you. Nice to hear.
Joe: (3:12)Are those numbers right?Joseph: (3:14)Yes and no. I think the fundamental problem with bank deposit rates is that there’s so many different types of deposits and because there’s so many types of deposits, it’s hard to kind of come up with one comparable interest rate across all banks and across all forms, right? So you have time deposits, for example, CDs that you just mentioned. You’ve got checking account rates — if they pay interest at all. And then you’ve got, you know, different balance requirements for different types of customers and things like that.
So coming up with an explicit one-size-fits-all bank deposit rate is difficult, but the phenomena that you’re describing where bank deposit rates in a rising rate environment go up like a feather, and in an interest rate cutting environment where the Fed is easing policy, they sink like a stone, that’s been a phenomena for decades.Tracy: (04:18)Well, let’s get into that then. So, you know, the Fed hikes rates on a Wednesday, why doesn’t that just automatically translate to a bunch of banks emailing savers and saying your deposit rate is going up? And I know there are a couple that do seem to automatically raise saving rates, but it’s not the norm.Joseph: (04:38)Well, the question boils down to kind of what does the bank need, right, in terms of financing? So most of its funding comes from deposits and banks have a fair amount of pricing power when it comes to deposits, right? There are not many substitutes for bank deposits out there. You might try a money market fund, for example. Or you might try, you know, bills or some of the things that you were talking about, but you’re not going to get the same level of liquidity, for example, with deposit insurance that you might with a bank deposit.
And so if you’re not faced with a lot of competition, and I’m talking about industry wide, then deposit rates don’t necessarily have to go up lockstep with the increase in the Fed funds rate. So to your point, you know, it’s not terribly surprising that deposit rates don’t go up immediately when the Fed raises rates.
Now I will say that they do go up and the real issue is not so much the level of rates, but the speed with which they go up. And that becomes a question of what people call the deposit beta, right? Which is how much of the monetary policy rate or the change in the Fed funds rate actually gets passed on to depositors, right?And what happens is that initially in the tightening cycle, banks are over deposited. And as those deposits migrate into higher yielding products and they lose financing, they start to compete more aggressively with each other and they start to try to poach deposits from one institution to the next.
And what you see is with subsequent rate hikes, the deposit beta right, goes up. And so what you normally find is that in the last tightening cycle, for example, the pass through effect was only about 35% to 40% in of the Fed’s rate hikes made it into bank deposit rates over the entire cycle. But if you started at the cycle, it was down around 10% and by the end of the cycle it was closer to 75% or 80%.
And that has happened, you know, pretty much every interest rate cycle going back decades, which is start low end high, but that the overall deposit beta for the cycle is somewhere around 30$ to 40% of the Fed’s rate. And again, this is a competitive dynamic, right? There’s not a lot of substitutes for deposits out there that offer the same level of deposit insurance or protection and liquidity. Then, you know, banks have a significant degree of pricing power when it comes to deposits.Tracy: (07:35)So, Joe, just on that note, this idea that eventually deposit rates do go up as the competitive process between banks kind of kicks in. One piece of interesting research that I saw from the New York Fed is this idea that deposit betas, so the relationship between benchmark rates and what banks are actually paying savers, that they have been trending lower in later interest rate cycles. So the beta now is lower than it was in, say, the early 2000s hiking cycle. It’s lower than it was in sort of the most recent hiking cycle as well. What accounts for that?Joseph: (08:16)You know, if I had to speculate, I’d say that there’s probably two things that may account for it. One is that QE has kind of changed the dynamics so that banks, you know, at the beginning of a tightening cycle are significantly more over deposited than they were in past tightening cycles. And that might account for why deposit betas are lower because banks have a thicker cushion of deposits and therefore they don’t have to compete as readily as they did, or as quickly as they did back in, you know, earlier tightening cycles.
The second thing, which I think doesn’t get as much attention, is the fact that I think banks increasingly, especially the larger domestic institutions, they’re not competing specifically on explicit interest. And I think what happens is that banks are able to pay people but especially institutions with services and rather than compete on interest rate, they compete on price services. So they may offer discounts, you know, volume discounts if you want to think about it.
And that that dynamic where you’ve got competition occurring through, you know, kind of a non-price mechanism, i.e. a non-interest price mechanism may alter how betas perform in the tightening cycle. So I think those are probably the two main reasons why deposit betas are not as high as they were in previous cycles.Joe: (09:49)So could factors like the quality of an online app, the size of the network, the ease of the website, the interconnectedness of a big bank’s website with payment apps like Zelle and other things like that, could these essentially be selling points where just Bank X — I won’t name any specific banks because I don’t know the details — Bank X says, ‘look, we have this great app, we have this great integration with all these things. Are you really going to move your, you know, $8,000 checking account over to Bank Y for one extra percent, it’s going to be like, you know, $15 extra a year and all the hassle it entails?Joseph: (10:31)Yes. I think that, I think that’s exactly right. I would also say that there’s a time tax involved too, right? Which is kind of the corollary of this, which is that your paycheck is linked directly to your checking account. And, you know, migrating it to a different bank requires, you know, kind of contacting HR or probably filling out online forms at your office to kind of change the, the direction. And that’s a hassle.
And I think the hassle effect is probably what keeps deposits sticky as well as the service effect that you mentioned, right? The non-price services. I would suspect that the effect is actually bigger for institutional deposits than it is for retail depositors, right? That institutions obviously would face much bigger costs switching banks in addition to other non-price services, which might include investment banking advice or things along that nature. That make deposits a little bit more sticky at the institutional level as well as at the retail level. So it’s not just retail, but also institutions.Tracy: (11:48)Right, if you’re a treasurer for a large company, I can imagine that there’s a whole process to changing your preferred bank.Joe: (11:55)Right. You know, Tracy and our producer Dash, I’m not going to say which one, but they’re both customers of a certain large bank’s fintech arm, and they’re always talking about the juicy interest rates they’re getting on their checking accounts. But it does seem like kind of a hassle to say, ‘yes, it is more money, but I don’t really like want to deal with it.’ What, you know, when we talk about competition, what about sort of classical ideas about market structure in terms of the number of banks, the size of the banks, the rise of like a handful of these mega national banks, and does that play any role in the sort of decline in deposit betas over time?Joseph: (12:37)You know, I’m not an industry analyst at that level. You know, we do have a lot of banks in the US and there is definitely a convenience factor to location, so it’s hard to know how that plays out, at least in my mind, in terms of deposit concentration. But deposits are definitely concentrated in the US at the largest banks, I will say that. Now again, is that because of the stickiness of those banks or the convenience or their online services or their network effects? I suspect it’s a variety of everything.Tracy: (13:21)So one thing I wanted to ask is, you know, the way retail deposits are supposed to work is you give the bank money, they pay you some interest, and the interest is coming from, I guess the array of central bank facilities nowadays, but also from the bank taking your money and lending it out into the wider economy. So to what degree are bank deposit rates also a function of the lending or investment opportunities that banks see in the market?Joseph: (13:52)The primary drivers going to be asset growth on the bank side, right? That determines how competitive banks have to be in deposits. And so if you think about the bank’s balance sheet on the asset side, it’s got essentially three types of assets. It’s got loans, it’s got cash that it has to maintain for regulatory purposes at the Federal Reserve, and it’s got securities – holdings, right — on the liability side.
Most of its funding comes in the form of deposits of some kind. And there’s an advantage to deposits, especially retail deposits because as you said, they are pretty sticky, right? And the stickiness is partly a function of the services, but it’s also a function of government guaranteed deposit insurance as well. In addition to that, there’s wholesale funding that they can rely on. Now, whether that’s commercial paper or term financing corporate debt, etc., these are all supplemental forms of funding that they can rely on to amp up their funding as asset growth, you know, as assets grow.
And so from a bank’s perspective, it’s got to figure out, it’s got to balance on the asset side, the interest returns on its earnings versus interest costs of raising more deposits, or raising more wholesale funding. And that balancing act is really the way monetary policy is expected to unfold, right? Monetary policy is expected to kind of influence that dynamic. The asset side of the balance sheet determines how you decide to fund it, whether you’re using deposits, which are probably the cheapest stickiest form of funding or whether you’re using wholesale funding, right? Which is a little bit more expensive, more flight prone, but you know, depending on your size, maybe easier to raise because you’ve more market access than say a smaller institution.
So it becomes kind of a question of, or at least monetary policy becomes a question of how do banks triage between their asset growth deposit — the loans, securities and cash — versus their liability side deposits and wholesale funding — its commercial paper, corporate bonds, other, you know, kind of term financing that’s available out there. And that kind of balancing is the way monetary policy is supposed to affect bank lending decisions and the transmission of the Fed’s interest rate changes.Joe: (16:24)Can you talk a little bit more about how retail deposits as a source of funding, their role in 2023 or 2022 or whatever, versus the past? You know, if we were having this conversation in the nineties or early 2000s, what is the role of retail deposits as a source of funding then versus today? Why has it changed?Joseph: (16:49)Yeah. So what I would say is that retail deposits have actually become more important over time because of regulatory changes. So if you recall back before the financial crisis, one of the things that was happening was that banks were increasingly reliant on wholesale funding, and they went to wholesale funding because it was cheap and it was readily available. But the result of that wholesale funding reliance was that a lot of their funding became very, very rate sensitive, or rather very flight prone.
And you can imagine an extreme situation where you’re financing, let’s say 30-year mortgages and you’re financing them on an overnight basis in the repo market, you have a significant maturity mismatch, right? Where if that repo funding can’t be rolled, you lose your source of financing for those mortgages. And so one of the consequences of the financial crisis, when we saw that funding was as prone as it was, particularly in these markets, regulators kind of emphasized the need for banks to hold more liquidity, in other words, hold higher cash balances at the Fed, right? And simultaneously rely more heavily on wholesale fund on retail funding that is deposit-based funding.
And so what we’ve seen over the last really 20 years or so, is a decline in the ratio of repo funding, CP market funding, you know, kind of these financial instruments of short maturities that were financing asset growth, you know, before 2006. And those have been replaced by more deposit funding.
Now, as I said earlier, initially, that will be reflected in higher deposit rates. Of course, QE at the time had suppressed deposit rates. And if you recall that before 2012, we had unlimited deposit insurance on transaction accounts for a while, right? In order to kind of keep funding stable for banks. What’s happened since then, is as interest rates go up, as I said earlier, banks have been able to compete on non-price or non-interest rate services more, and the deposits have kind of remained sticky.So you have this kind of wholesale shift away from kind of wholesale funding to retail deposits. And if you want to go back even further, this looks more akin to an environment that kind of existed, you know, prior to the 1980s right? To an environment where banks were much more deposit reliant and much less reliant on financial products. And if you look back, you know, further, this kind of really beckons to an era of, you know, kind of pre-interest rate decontrol before 1980. But again, that’s going back a lot, many, many, many years now.Tracy: (19:48)So deposits are more important as a source of bank funding thanks to the experience of the financial crisis and post-GFC regulation. And at the same time, because we’ve had things like QE, a lot of banks are simply swimming in deposits to the extent that they kind of have more than they perhaps need, which means that they are willing to allow depositors to maybe look elsewhere for better rates.Joseph: (20:19)They are, however, some banks are losing deposits faster than other banks.Tracy: (20:27)Yes, I wanted you to bring this up. This is the small bank versus large bank deposit experience. And also this dovetails with a previous episode on discount lending, the discount window.Joseph: (20:39)I’m sorry, I missed that discount window lending piece , but I think you’re exactly right here, which is that the level of deposits and the level of bank reserves in the system — that is the cash and the liquidity circulating in the system — is important, but so too is the distribution of those balances across institutions.
And what we’re seeing is that unlike QT or quantitative tightening in 2017, the deposits are leaving, right? Or at least the cash is leaving small banks faster than it’s leaving the large banks. And so the smaller banks are forced to compete more aggressively in deposit markets than say the larger banks.
Now, part of this is a reflection of the fact that when QT occurred, deposit balances migrated to the largest institutions out there. Again, because deposits are heavily concentrated. And so those banks tended to be more over deposited, relatively speaking, than the smaller institutions. So that when the Fed is draining reserves and shrinking its balance sheet, the people that have less liquidity to start off with because they had fewer deposits, those are the institutions that are experiencing more deposit rate pressure.Joe: (22:04)How do the small banks even compete? I mean, I guess rates as you say, but like, is this like going to be a permanent condition of banking? The struggle that the small banks have for deposits relative to these high, high networked large national banks?Joseph: (22:22)Again, you know, small banks would argue that there are advantages to banking locally. And that the advantage to banking locally is, you know, your mortgage lender knows the market, right? Knows the housing market in your area, your commercial banker knows your business, knows you personally, etc.
And so there’s, you know, I wouldn’t say that it’s inevitable that all deposits will migrate to large institutions, and large institutions will, you know, be selective in paying deposit rates. I still think that there’s enough competition between large and small banks, right? That, you know, small banks are not going away at all. But again, this deposit competition that we’re experiencing right now is the aftershock of quantitative easing, right? Quantitative easing and the buying of Treasury securities and mortgages, again, ended up putting a lot of deposits into the system as a whole, but those deposits tended to pile up faster at the larger institutions than the smaller institutions.Tracy: (23:34)So just on that note, and you already touched on this, but can you dig in a little bit more into what QT or quantitative tightening actually means, for, I guess the effectiveness of monetary policy. Does it mechanically ramp up that competition for depositors? Or does it maybe encourage some sort of substitution effect where, you know, banks can, I don’t know, replace bank deposits with rate sensitive Treasuries or something like that?Joseph: (24:07)That’s again, an important distinction. And I think what you have to look at here is the demand curve for bank reserves, right? This is the liquidity that’s in the system created from QE, right? From the asset side of the Fed’s balance sheet. And these reserves are used to meet intraday requirements for settling payments, as well as liquidity requirements for regulatory purposes that banks are required to maintain.
And as the Fed lets the assets on its balance sheet roll off, and doesn’t replace them so that its balance sheet shrinks, bank reserves go down, right? And the decline in bank reserves is what forces banks ultimately to compete more aggressively in deposit markets because they need to restore that cash position on their balance sheet, in addition to the fact that their assets are growing, right? They’re making loans, they need to replace that funding.The extent to which QT creates reserve pressure, is what creates the pressure on the Fed funds rate, right? The Fed’s policy instrument, and determines ultimately where the Fed funds rate trades within its target band, right? So what the Fed wants to do is, if you think about the demand curve, the demand curve is probably for bank reserves it’s probably, I’m going to get this wrong, concave-shaped, right? So it kind of caves in, in the middle. And when you get to the upper part of the demand curve, you’re in the steep slope. And what the steep slope of that demand curve means is that changes in the level of bank reserves create significant changes in interest rates. And the goal, from the Fed’s perspective, is merely to shift the supply of bank reserves so that it’s in the gently-sloping part of the demand curve, right?That the level of bank reserves is ample, right? But not abundant. And ample means that it’s not scarce, right? So that the level of the Fed funds rate relative to other market rates are within the band, right? It’s comfortably in the middle, right? Remember the Fed is targeting a 25 basis point band between the top and the bottom on the Fed funds rate. And the goal is to kind of keep the Fed funds rate, you know, within the midpoint, let’s say, of that band, right? Or close to that midpoint.
So again, you want to stay away from the steep part of the demand curve, but it’s the same respect, right? Unless you’re, you know, substantially easing policy and you’ve pushed rates to zero, you also want to stay away from the super flat part of the demand curve, right? Where you’ve got bank reserves in excess of $4 trillion, interest rates are totally unresponsive to the level of liquidity in the system because you’ve effectively driven rates to zero. So, again, that’s kind of a long-winded way of describing what the goal of QT is, right? Create enough pressure on interest rates, but not too much.Joe: (27:20)Do you have an estimate for how small the Fed is going to shrink its balance sheet ultimately?Joseph: (27:26)So this is pretty complicated, and I think you have to be pretty humble about this.Tracy: (27:32)We should ask what the level of ample excess reserves is too, just to get all the loaded questions out there.Joseph: (27:39)All right. So my sense is that the level of ample reserves is probably around $2.7 trillion, but I’m a little bit cautious about that because I think the level of reserves is less important than the ratio of reserve balances to the total cash, the total assets that banks have. So that if you look at 2019 when we saw that bank reserves got too thin, we saw that, you know, going back to our demand curve, right? The ratio of bank cash assets to total assets shrank below 8%. So the 8% mark is kind of the threshold that divides ample from scarce.
And so my sense is you want to keep bank reserves in terms of ample around 8% or higher, right? At the moment, they’re around 9%. If you break that number down between domestic banks and small banks, right? You see a very different picture. Domestic banks, that ratio is around 10.5% and they’re probably still two percentage points or more away from that 2019 level where they were scarce.
If you look at small banks, they’re around 6% of assets, and that’s much closer to where they were in 2019. So as we were talking about before, you know, ample, in an aggregate sense, you would definitely say that bank reserves are ample. But in a relative sense, in terms of the distribution between large and small banks, it’s not clear that there’s as much ampleness of bank reserves as the numbers suggest.Tracy: (29:35)I just have one more question, which is you know, in the interests of I guess both financial stability and the effective transmission of monetary policy and fighting inflation, should we all be going out and, you know, finding the best deposit deals for ourselves? Should we all be moving our money around? Is this helpful?Joseph: (29:53)Yeah, I mean, everybody wants to earn more money. So I would expect that people would migrate their balances to higher-yielding products. And the closest substitute for bank deposits at this point is a money market fund. And the curious thing is that money market funds are not experiencing inflows, right?
So money market fund balances are paying about 4% or more in terms of seven-day yields, right? So you can definitely earn more than the 23 basis points you mentioned, in a government-only money market fund. And what’s puzzling at least to me, is that given that difference between what you can earn in a money market fund and a bank deposit, why aren’t money fund balances going up? Why aren’t they significantly higher than they are right now? And I suspect that there are two reasons for this, right?One is that on the retail side, we are seeing some level of interest rate sensitivity, but people are moving into higher-yielding products than government-only money market funds. And in fact, what they’re doing is they’re moving into prime money market funds. And the prime money market funds, I won’t go into the details, but they buy commercial paper and other credit instruments, right? All short maturity, but they earn a little bit more than a government money market fund.
And so if you’re an interest rate sensitive investor, and you’re looking for higher yields, you’re going to migrate into the prime funds. And what we’ve seen is prime fund balances have gone up sharply, at least since liftoff. When you look at institutional investors, I think what institutional investors are doing is they’re buying bills, right? They’re looking at bill yields and saying, bill yields are significantly higher than what I can get on a money market fund, right?And so I’m going to buy bills rather than invest in money market funds because I can earn higher yields. What I do not think is true is that I do not believe that multiple years of quantitative easing have somehow suppressed interest rate sensitivity among investors so that they no longer care about 4% yields in money market funds and will be happy to earn 23 basis points in a bank deposit and not move. I suspect, and we are seeing this, is money is coming out of deposits, but it’s migrating into higher-yielding stuff and not necessarily governmental money market funds, at least for now.Tracy: (32:33)Okay. Joe, that was a fantastic explanation of how this all works. Absolutely. Thank you so much for coming on Odd Lots, you fulfilled a long held dream of mine to get you on the show, so thank you so much.Joseph: (32:45)All right, thank you. Bye now.Tracy: (32:59)So Joe, I thought that was not just an interesting walk through the question at hand, which is ‘why aren’t banks raising deposit rates?,’ but also kind of a really nice overview of how the monetary policy interaction with the financial system has actually changed since the 2008 financial crisis.Joe: (33:17)No, I mean, I was really interested in that sort of headline question. ‘Why don’t they raise rates?’ But also I was just sort of curious about how do banks work, you know, no seriously, like what is the role of deposits?Tracy: (33:30)Now you’re like, ‘why isn’t more money flowing into government money market funds?’Joe: (33:34)Well, yeah, I mean, seriously, but I mean all these things, over time, the policy changes that were made, you know, post-great financial crisis, that sort of put this premium on deposits, you know, there’s this stat that I’ve seen and heard that you’re more likely to get divorced than to ever change banks in your life. And so what I’ve heard, and I don’t know if it’s true, although you know who knows, is our frequent guest Patrick McKenzie has written about this, but why do banks still have these physical [branches]. Because, I’ve heard, that if they could just get like a few people in the door, you’re worth so much money over the course of the lifetime as a customer. Even though no one goes into those retail things. And it’s partly because no one ever really switches banks.Tracy: (34:16)I think it is a phenomenally sticky business model. And I remember when I went to university in London, I remember banks pitching these student programs and if I was still in London, I think I would still be with the bank that recruited me when I was a college student.Joe: (34:34)It’s weird because I think intuitively you’d think with the internet that moving money from one account to another would be more liquid and more easy. But it somehow, it seems the opposite because you have all these apps and you have passwords and you have bills connected to your account. And so if you’re like, I’m going to change banks, that’s so many things to switch, it’s just not worth it.Tracy: (34:53)The network effect. Yeah. The same thing that mantains dollar dominanceJoe: (34:57)And Twitter dominance and Facebook dominance, it’s network effects all the way down.Tracy: (35:03)So the two other things I thought were really interesting, just very quickly, are that idea of reserve scarcity. And this is something that came up with Bill Nelson when we were talking about why have we seen this tick up in discount lending to the banks? This idea that even though we still have a lot of reserves and liquidity in the system, they are not evenly distributed. And then secondly, this idea that as quantitative tightening really kicks into gear, you might start to get this process where deposit rates start going higher and there is that substitution effect.Joe: (35:36)Yeah. And the fact that you can’t actually, or you’re only going to get so far taking a crude measure of cash to total assets because of this very [big] difference in model between the big domestic banks and the small banks and how the smaller banks might run into liquidity scarcity a lot faster than the larger banks. So, you know, I can see why analysts like Joe are in demand because it’s not as simple as just sort of like looking at one number and dividing by another number.Tracy: (36:08)Totally. Banking is not a monolith. And also everyone should go deposit rate shopping in order to make more money and improve the monetary policy mechanism.Joe: (36:18)Won’t that worsen inflation? We’ll all be getting more income and more income is the last thing that we all need right now. If I was to that FinTech you guys are in, I’d be spending that money.Tracy: (36:28) Okay. We’re back to the circular nature of like prices going down and then increasing prices. And then we never get out of it. Shall we leave it there?
Joe: (36:36)Let’s leave it there.
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