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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.

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