Have you read the fine print on high yield savings accounts? Do you have any idea how banks are screwing you by renaming products?
Beware the Name Change Bait and Switch
The Wall Street Journal notes High-Yield Savings Accounts Come With an Asterisk
Online-centric banks such as UFB, Capital One Financial and CIT Bank attract deposits by paying rates far higher than typical bricks-and-mortar banks. Rates on these high-yield accounts generally rise alongside U.S. interest rates without depositors needing to take any action. But some customers say these lenders deceived them by advertising competitive rates while paying longtime customers lower ones. In some cases, only customers who were monitoring their bank’s every move could notice and respond to the changes.
“You think you’ll get a higher rate and it will keep going up,” said Ken Tumin, founder of DepositAccounts.com, a website owned by LendingTree that tracks banks’ account offerings. “But there are games they play to get deposits without having to pay the highest interest rates.”
UFB did this eight times starting with a a product simply called Savings. A few weeks later, the lender advertised Rewards Savings as its main offering, paying 2.21%. It left the rate on the older account called Savings at 1.81%.
UFB did this eight more times. The ironic name Best Savings was followed by Preferred Savings, then Priority Savings. The current offering called Secure Savings, pays 5.25%.
The Need for a Genuine Savings Bank
The country needs a genuine savings bank that pays interest at the Fed funds rate minus a small cut to the bank taking the deposits.
A genuine safekeeping bank would not make loans, and would park all deposits at the Fed. Interest rates would change when the Fed made target rate changes.
There would be no need for FDIC because there would be no risk.
Why Silicon Valley Bank Blew Up
Silicon Valley Bank blew up because it was greedy and stupid while the Fed stood idly by. SVB took customer deposits and speculated on long-term interest rates. When rates rose, capital losses mounted and regulators took over the bank.
None of this would have happened if SVB parked deposits at the Fed. Instead of blowing up, rates on deposits would have kept rising, and it would have attracted more deposits which would have forced other banks into similar offerings.
Silicon Valley Bank Collapses, 93 Percent of Deposits Not Insured!
Flashback, March 10, 2023: Silicon Valley Bank Collapses, 93 Percent of Deposits Not Insured! What Now?
Part of what made SVB unique is its client base—the vast majority of its customer’s accounts were too big for full FDIC insurance.
Too big for FDIC?
Had SVB parked deposits at the Fed and made no loans, there would have been no discernable risk.
Dear FDIC and Fed, We Need a Genuine Safekeeping Bank, Not Band-Aids
On June 18, 2023, I wrote this call to action: Dear FDIC and Fed, We Need a Genuine Safekeeping Bank, Not Band-Aids
The FDIC Proposes a Special Deposit Insurance Assessment on Large Banks to reimburse the FDIC for the losses due to rapid flight of “uninsured” depositors at Silicon Valley Bank.
Understanding the Real Problem
The 2023 bank failures arose from what the banks did with those uninsured deposits, not the fact that the deposits were uninsured.
Banks could easily have parked the money back at the Fed collecting generous amounts of free money because the Fed pays interest on reserves.
Instead, the banks made enormous bets that interest rates would not rise rapidly. When rates rose, paper losses soared, and the banks became capital impaired.
This borrow-short, lend-long issue applies to all banks, not just the troubled banks that failed.
Attacking Symptoms
The proposal by the FDIC board of directors and the Consumer Financial Protection Bureau Director cannot accomplish much because it does nothing to address the problem.
Special assessments amount to little more than putting Band-Aids on a symptom of the problem, that being capital flight to big banks.
Pertinent Question
Why are banks allowed to gamble on interest rate policy with deposits allegedly payable on demand?
Logically, money cannot be available on demand while simultaneously parked in long-term treasuries, but that is precisely what FDIC and Fed regulations allow.
That banks do speculate with interest rate bets on deposits highlights repeat failures by the Fed, by the FDIC, and the Consumer Financial Protection Bureau.
The Fed and FDIC let this obvious problem brew for decades through multiple recessions. The Fed and FDIC learned nothing from past mistakes.
Chopra says “We need simpler rules to prevent future disasters. Large, riskier banks should pay more and small, simpler banks should pay less.”
The first sentence is true, the second isn’t because it addresses bank size, not actions. A size-based FDIC assessment would not have prevented the disaster at SVB.
My Plan vs the Fed’s Plan
I proposed creation of a 100 percent safekeeping bank, one that did not make any loans but only parked money at the Fed, in T-Bills, or in time-matched treasuries.
Since that would have caused a stampede, I proposed a 10-point way to get there over time.
The Fed’s plan allows banks like UFB to come out with a new product every month, with similar sounding names, to purposely confuse customers.
We Don’t Need to Fix FDIC, We Need a Genuinely Safe Bank
I wrote a follow-up article on December 15, 2023 titled We Don’t Need to Fix FDIC, We Need a Genuinely Safe Bank
There should be no FDIC at all. Instead, what we need is a safekeeping bank.
Fed policies and actions precipitate excessive risk taking. Because of FDIC, people have no skin in the game. This encourages people to shop for the best deal not the safest deal because there is no risk up to the FDIC limit.
And banks, following ludicrous Fed forward guidance, excessively speculate on outcomes.
Interest rate speculation blew up Silicon Valley Bank. The way to impose discipline is not another dubious Fed program by people proven to be oblivious to the problem.
The Fed and the FDIC were asleep at the wheel on SVB. The Fed has never called a recession in real time, and is totally clueless about what inflation is.
To fix the problem we need to start over.
How about creating a safekeeping bank that needs no insurance of any kind other than perhaps a token amount for fraud protection to ensure safe keeping banks are doing what’s required. FDIC did not stop a run on SVB. Had it been a safekeeping bank, there never would have been a run in the first place.
Q: Why Don’t We Have a Safekeeping Bank?
A: That’s easy. The Fed doesn’t want one.
Peter Schiff created one and the Fed forced Schiff out. Caitlin Long, CEO and founder of Custodia Bank, wants to create one and the Fed said no.
See the Fed press release: Federal Reserve Board announces denial of application by Custodia Bank, Inc. to become a member of the Federal Reserve System
Irony of the Day – Legalized Fraud
Silicon Valley Bank, Signature Bank, and First Republic Bank failed due to classic runs on the bank. The banks took customer deposits and speculated on long-term interest rates. When the Fed hiked rates more than expected, bank losses mounted, the banks became insolvent, and customers pulled deposits.
This is a classic example of a duration mismatch scheme that I consider legalized fraud. Money that was supposed to be available on demand was not available on demand.
One cannot legally lease an apartment to two different parties at the same time. Anyone who tried would be quickly arrested. This is in essence what these banks did by investing for years money supposedly available on demand.
Because Custodia Bank does not make loans and because it holds deposits in short term treasuries, a run on Custodia Bank would not cause the bank to fail.
The big irony is the Fed refused to grant FDIC to a bank operating on the safest possible policies but fails to monitor massive speculation (arguably outright fraud) on banks right under its nose.
Discussion and 10 Details
For discussion and 10 specific details on what I propose, please see Dear FDIC and Fed, We Need a Genuine Safekeeping Bank, Not Band-Aids
The Fed does not want competition because it wants to eventually force you at some later date into using its own allegedly safe Central Bank Digital currency.
Meanwhile, expect more Band-Aids.
Some banks offer a custodial account. These accounts are off-balance sheet from the bank and have no claims against them, even capital calculations. They are normally brokerage accounts where you buy securities like t-bills for safety. All securities are in your name, not street name like other brokerage accounts. The bank will charge you a small fee around 10 basis points.
Hi John
Thanks for Chiming In
the real problem I have with FED is that they ‘saved’ depositors over the $250,000 limit
they needed to wipe them up and spit them out with LESS THAN they deserved
I agree that some leases require huge deposits – which should not have been sacrificed, but remaining needed to find out CONSEQUENCES
We had over 30k banks, now down to a few k.
Shifting from Central Planning to a Decentralised Economy: Do we Need Central Banks? by Professor Richard A. Werner, D.Phil. (Oxon)
Synchrony Bank savings has paid roughly what it should vs. fed funds rate over the past few years. It is currently paying around 4.75%-5% (it was as high as 5.25% last year) and I didn’t have to open a new account to get that vs. the ~2% it was paying ~2 years ago.
Get a better Bank. Blindly stumbling through life while assuming someone else is looking out for you is suicide. If you don’t trust one government agency to “take care of you” creating a new agency ain’t the answer.
FYI: I just opened a 5.4% 12 mo. CD. A week later thay saised the rate to 5.5%.
Biden should have been impeached on the spot for bailing out the domestic depositors from Silicon Vally Bank.
But the Majority News Media made him out to be a hero. Until the Majority News Media tells the truth about these events, these kind of problems, will never get fixed. We need accountability not an alternative Bank.
Isn’t a real part of the problem this ‘hold to maturity” nonsense that the accountants and their government supervisors came up with?
Mike Johnson supports Israel, but on Mar 8 he might shut down Biden’s police state.
If Trump deferred/cancelled ==> Glenn Youngkin to the white house.
Bank rate schemes have been around for decades. Online banking and blog reviews make it easier to sidestep these rackets. The elimination of money market monthly transfer limits allows frequent sweeps between checking and federal MM accounts. Vanguard advertises a high rate short term FDIC insured account for deposits up to $1M.
SVB fashioned a country club atmosphere that catered to the egobag VC depositors that ignored FDIC limits. Regulation that’s written at the bottom of every bank statement. In combination with the Fed’s incompetent DEI hire Mary Daly, forged the downfall of the bank. The reward for Daly’s myopic failure, she was promoted to a Fed voting member.
Unfortunately for tax payers, the too-arrogant-to-fail VC depositors at SVB scammed the most vapid money manager to head the Fed/Treasury, Janet Yellen. VCs used their media PR machine that shills crypto currency and AI, to dupe markets into the hoax; their bailout would prevent a nation wide bank cascade.
Re “There would be no need for FDIC because there would be no risk.”
Disagree – whenever humans are involved there is always risk of fraud or error.
But is there even a need for a banking middleman? The Fed could presumably offer Mish’s SavingsBank via computer deposits directly to retail customers.
To cut out even more middlemen, skip the Fed: TreasuryDirect.gov could get its act together and offer reasonable money-market interest rates on what is currently called “Zero Percent C-of-I”.
In the meantime, the Federal/Treasury type money market funds are better than savings accounts, with the possible exception that you’re funding the profligate US government instead of enabling bankers to (hypothetically) invest in growing the economy.
What Capital One did to its savings account customers was… so blatantly rude (for starters), it defied belief and confused many.
ps. Congrats, Mish, for making Top o’ ZH.
Don’t think this is a good idea. We need real banks, mainly to allocate capital to SMEs. The 100 percent savings bank doesn’t do what a bank is supposed to do. At the same time, the 100 percent savings bank already exists in the form of money market funds (with, however SPIC instead of FDIC insurance; some brokerages offer money market products, such Vanguard’s Cash Plus, that are FDIC insured). The problem is not the financial market supply side. The problem is the demand side, i.e. that most people lack the financial education to realize that as significant depositors (bank deposits are about $17 trillion), they are getting fleeced by the banks. To compare, $6 trillion is in money market funds.
Bank mortgage loans used to be restricted to 60 percent of savings.
As Thomas Hoenig said WSJ March 18-19-2023: “Another Banking Crisis Was Predictable” “SVB had billions of assets that were rated risk-free or low-risk from a credit perspective, but they were not duration-risk free”
If the commercial bankers are given the sovereign right to create legal tender, then the DFIs must be severely circumscribed in the management of both their assets and their liabilities – or made quasi-gov’t institutions.
I have greatly enjoyed my CIT Platinum account paying 5% interest over the last year.
I parked my business account there last Feb and earned about 6k in interest on money that wasn’t doing anything before.
I’m not loyal to a bank, I’m loyal to a rate.
You’d get more with brokered CDs.
Remunerating interbank demand deposits is a bad idea. By paying the banks not to lend, to sterilize reserves, it artificially suppresses the real rate of interest. The wealth effect is actually impoverishing.
Bernanke, pg. 287, “Lower long-term rates also tend to raise asset prices, including house and stock prices, which, by making people feel wealthier, tends to stimulate consumer spending-the “wealth effect”.
“Housing is considered unaffordable if it costs more than 30% of an individual’s income”.
Restore the banking rules prior to late 1990s amd early 2000s deregulation and you will see all would be well. Prices would come down on commodities and inflation would be much lower and economic and productivity growth would rise. Jobs would be plentiful and the Fed would actually have to raise rates. The deregulation of the late 90s and early 2000s is what has caused an illusion in prices of everything and slowed economic growth to a crawl. Some would have you believe it is demographics. Housing would be much cheaper. The banks have played a trick on the American people. The banks and Fed did this in order to create a derivatives market that now contributes to inflation of commodities on the order of 50%. Prices would come down overnight with proper banking and derivatives reregulation.
The nonbanks (thrifts) didn’t have any rate caps until 1966. The nonbanks are not in competition with the banks. However, the banks can outbid the nonbanks for loan funds, it’s called disintermediation (a term that only applies to the nonbanks since 1933). The banks began to induce disintermediation after 5 successive rate hikes beginning in 1957 which precipitated the first “credit crunch”.
The excessive competition for savings during the Great Depression resulted in the imposition of Regulation Q Ceilings for just the commercial banks.
Gilbert, Alton. in his: “Requiem for Regulation Q: What It Did and Why It Passed Away” confused a bank with a nonbank.
Dr. Gilbert asked the wrong question. His implicit and false premise was that savings are a source of loan-funds to the banking system. Gilbert assumed that any potential primary deposit (actually derivative deposits, funds acquired from other DFIs within the system), were newfound funds to the banking system as a whole.
Thereby in his analysis, Gilbert also assumes that every dollar placed with a non-bank deprives some commercial bank of a corresponding volume of loanable funds [sic].
Between Dec 1957 and July 1959, for a year and a half, SPX took off like a rocket.
SPX backbone was Jan/Feb 1959. JFK election visited the BB. 1962 low breached it.
A spring, a booster, that sent SPX to Jan 1966 high.
The Fed hiked between Mar 2022 and Aug 2023 to fight the hyperinflation. Those who invested in the US 10Y paid the price. Those who parked in RRP, which hiked every 1M/2M, survived. When the Fed stopped hiking they bought bills and notes: 3M, 1Y…10Y. RRP dropped from $2.5T in Dec 2022 to $520B. Fed balance shiiit: Assets-RRP. In 2023 when RRP was pouring liquidity into the markets : QE, not QT, to the Mag7 and the Dow.
“The country needs a genuine savings bank that pays interest at the Fed funds rate minus a small cut to the bank taking the deposits.”
This idea is so good that it will never be mentioned anywhere else.
I would add, there could be some lending based on selling low volatility term deposits.
However, I expect this idea to be repacked as CBDC where the government can track all your transactions.
You get high real rates of interest by slowing money growth while driving the banks out of the savings business. I.e., you increase savings velocity. The U.S. Golden Era in Capitalism was where 2/3 of GDP was financed by velocity, and 1/3 by money.
Lending/investing by the DFIs (deposit taking, money creating institutions), expands both the volume and the velocity of new money. I.e., lending/investing by the DFIs is inflationary.
Lending/investing by the NBFIs (nonbanks) increases the turnover of existing deposits (a transfer of ownership), within the commercial banking system. I.e., lending/investing by the NBFIs is non-inflationary (other things equal).
Jun 30, 2021
The entire financial sector, from brokers to advisors, analysts and bankers all the way to the Fed, is the same.
Under skilled and over priced, to the extent that they regularly resort to sleazy tactics, the fine print, to make money.
The main problem, they over think and assume their expertise is better than ground-floor observation, though the same can be said of many sectors, financials are the big winner in a long history of proven, often conveniently biased miscalculation.
2008 comes to mind, they conveniently miscalculated CDO’s, then when they realized it, they shorted them without disclosure while continuing to sell them as “AAA” securities.
There were no criminal sentences, but plenty of golden parachutes back then.
.
That’s an intermediary, not a bank. It would function like a MMMF. It would not create new money.
And its fundamentally juxtaposed to the way the commercial banking system works. All bank-held savings are endogenous. Loans/investments = deposits. Deposit classifications are interchangeable.
The banks should not pay any interest on its deposits. They lose money by paying for the deposits that they collectively already own. I.e., saver-holders never transfer their funds outside of the payments system unless they are hoarding currency. The NBFIs are the DFI’s customers.
You lost me at “banks should not pay interest on deposits”. There should be a market rate for deposits as for anything else.
On followup, I also don’t think “all” bank-held savings are endogenous. While retail bank decisions to create loans also create deposits, the Federal Reserve’s role is a bit different.
Custodia Bank doesnt sound like they were going to follow your plan…
“The firm proposed to engage in novel and untested crypto activities that include issuing a crypto asset on open, public and/or decentralized networks.
The firm’s novel business model and proposed focus on crypto-assets presented significant safety and soundness risks. The Board has previously made clear that such crypto activities are highly likely to be inconsistent with safe and sound banking practices. The Board also found that Custodia’s risk management framework was insufficient to address concerns regarding the heightened risks associated with its proposed crypto activities, including its ability to mitigate money laundering and terrorism financing risks.”
just sayin jacking around in crypto doesn’t sound like it matches sup with your idea??
You are mistaken.
Custodia bank makes no loans. It parks all deposits at the Fed.
This is a slam because they take money from and to crypto – nothing to do with the issues I stated.
Because they park all deposits at the Fed, they have zero risk of a run.
If it only parks your money at the Fed, then why not just have your money parked directly at the Fed? The Custodia bank is just another middleman that takes a cut without providing anything extra.
one hell of a fckn paronomasia , don t actually know what it means exactly bt must be summat of the kind …..like you said not so long ago, ‘in vino veritas’ …. grts
Your English skills have declined.
“ then why not just have your money parked directly at the Fed? “
Uhhh …. because you can’t.
But since you like the idea, it will be here soon enough with a Central Bank Digital Currency.
Happy?
I don’t dislike the idea. I just don’t see it’s utility if the Fed in the future could offer you the same service. The Custodia Bank doesn’t exist nor does the Central Bank Digital Currency so we are giving our opinions on two things that don’t exist. We should both be novelists.
This happened to me with Capital One. I had a high yield account with them for about 15 years. Then I got a notification that they were “discontinuing” my account type. Not to worry though, I would be automatically placed in one of thier new equivalent accounts. “Equivalent” was used quite loosely. And this all happened right around the time interest rates started increasing.
Well, guess what, the newer account paid squat in interest. I only noticed this after about 6 months. Capital One had a “new” account that paid around the same rate as my old account, but I had to open a new account under the new high yield name and transfer my cash to that account. Pain in the ass. Bottom line….always read the fine print and pay very close attention to what these banks are doing. They don’t have your best interest in mind.
I had the same problem with my bank recently.
Why not just bypass the banks. Buy Treasury bills, notes and bonds at Treasury Direct online or through your broker online.
Treasury Direct is the easiest and cheapest (it’s free) in my view. Great place to park emergency fund cash, and earn a decent rate.
Treasury Direct has the worst interface ever, it’s total trash compared to Fidelity. You buy all the bonds you want and actual productive assets that will beat inflation on one platform.
I’ll admit it’s a bit clunky, but I’ve never had any problems navigating the site and finding what I need.
Because most of us also need a healthy amount of liquidity, which you don’t get in bills, notes or bonds. For liquidity, the Zero Percent C of I at TreasuryDirect is at least 5% below market rate.
This doesnt matter. We had zero percent interest rates for 14 years (2006-2020) and the wealthy used all this free money to “take America private.” They bought up everything .. stocks, bonds, houses, apartment buildings, businesses (they bought their competitor), etc. with zero percent money. And now that they own more and more of America, they like this feudal system they have created. Once a new president is elected, no matter who they are, they both have incentives to go right back to zero percent rates — inflation be damned. So dont worry about high interest accounts. In a year, theyll be gone.
Yeah, we’re going back to ZIRP. The economy doesn’t work otherwise, and tying money up in interest rate sensitive products is a fools game. You’ll be impoverished via inflation by sitting in ‘safe’ assets like treasuries and savings accounts.
How about if the SVP depositors in excess of $250K don’t get a penny above the $250K FDIC.
This would restore moral hazard back into the system.
The venture capitalists, corporations, private equity will lose if they opt to deposit their payroll, accounts payable, accounts receivable, etc., deposits in a bank that is not properly hedged, or has taken too many risks. Shouldn’t the aforementioned depositers performed their due diligence?
Clearly you don’t understand much of anything about banking. It ONLY works if depositors are protected. There would be bank runs EVERYWHERE and the entire banking system can be destroyed because of idiots who don’t understand.
Bank runs are NOT logical and the ENTIRE economy depends upon banking and loans to remain stable, much less have continued growth.
Contagion could have easily spread from the SVB and other bank debacles that would have wiped out a massive amount of money and liquidity and loans in the entire banking system.
Learn more about Economics and Money and Banking.
Banking functioned for centuries without depositor protections. That gave the depositors a serious incentive to do due diligence on the banks, far superior to regulators. Consider that SVB didn’t fail because regulators caught it, it failed because its own depositors saw it was broke.
As Mark Twain put it, “If you’re going to put all your eggs in one basket, you’d better guard that basket.”
FDIC insurance provides reasonable protection for individuals who lack the resources to fully investigate their bank, while keeping enough moral hazard to ensure a healthier banking system. The insurance amount should perhaps be larger (or at least indexed to inflation) but the principle is sound.
The Calvinball approach to bailing out SVB strikes deeply at market confidence in the rule of law in this country.
One can just open a brokerage account at your bank and buy T bills. That’s the same as the Mish plan and you can do it today.
What could possibly be the reason the Fed says no? They don’t want to pay interest on all the money it would pull in?
‘the Fed’ exists to do the will of the member banks. It is a tool of financial giants, so harming them to the benefit of the proles won’t happen. It’s the same reason ‘the Fed’ wants to inflate away your purchasing power.
Brazil 10 year bonds are still paying 10.71%. Rates have been coming down this year so act now.
PBR pays an 18% dividend! I wish I had bought more.
I bought 1500 shares back when it was 11.10. Since then I have received over 4 dollars in dividends and the share price has risen by over 50%.
It’s, by far, my best winner. I wish I had put more into it.
And….it still has a PE of below 4, making it priced 3x cheaper than it’s competitors.
The risk is purely political, but very very low. MOst people do not realize that the government owns 51% of the shares, and if they cut the divident, the government loses its funding for welfare, which is how welfare is funded in Brazil.
Therefore the dividend will remain. It’s already been cut, but 17% is still a massive dividend.
I know someone who won the lottery twice ….no kidding ….all a matter of fckn luck in other words….
Mish, that is a wonderful idea! I myself would be all over that if it came about!