A Banking Game Bait and Switch on Interest Rates, Fed Stands Idly By


by Mish Shedlock, Mish Talk:

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.

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“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.

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