The Wall Street Journal is out with a piece on how interest rates are up, and claims (and pretty much fails) to explain why rates on bank deposits (checking and savings) aren’t up.
Here’s an idea about why deposit rates aren’t up, and likely will go up very slowly if rates continue to rise: less competition.
The chart above shows how the largest five banks have seen their assets explode higher right along with how much market share they control. Since 1990, you can see the top five went from 10% to roughly 40% of all assets.
What’s the big deal about competition for deposit rates? Let’s think about being a banker. If you have less small-to-midsize competitors then it’s a lot easier to act as an oligopoly (a small group in power) with your other banker friends. You can raise rates on loans, suppress the amounts you pay on deposits….and profit big time. Less competition and more cooperation among the big banks should mean that the pace of deposit rate increases will be tempered because no banks with any clout in the market will try to gain market share since they already own it!
What to do?
Investors would be wise to be systematic about how much cash they’re sitting on. Keep checking account balances low, max out an emergency savings fund with a reasonable FDIC-insured yield (at least 1% right now), and avoid having excess cash sitting around. You won’t get rich with an indefinite 1% yield so it’s crucial investors make smart decisions about striking the right balance between liquidity (yes, with the big bankers) and long-term investments (in stock and bond markets).