The problem for many regional banks in the US has been highlighted recently in a Brownstone research note. In the note, the author points out that many US banks are still offering very low-interest rates for depositors. Despite the Fed having hiked rates to nearly 5% the national average for banks offering interest rates is 0.24% a year.

Why is this strange?

It is strange because 3-month US treasuries are offering a yield over 4%. That is the rate at which banks can purchase US treasuries and earn that 4% plus yield back on their assets. (The assets are the depositor’s capital). So, in theory, the banks should be able to offer higher interest rates of 3.5%+. So, why aren’t they?

Banks Bought bonds when yields were low

Prior to the Fed hiking interest rates banks were buying longer dated US Treasuries at very low yields as it was a low interest rate environment. You can see that longer dated bonds were offering lower yields when many banks were buying them up as the ‘safest option’.

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The problem now is that much of that capital is still tied up in those lower yielding treasuries, so they don’t have the liquidity to purchase new higher yielding bonds.

Didn’t the Bank Term Funding Program solve it?

No, because Brownstone explain that these funds are being used for operating expenses and to return deposits to people leaving the banks. This will create another problem because banks need to pay back their Bank Term Funding Program loans. So, this is why some commentators are very nervous about the banking sector and that there may be more weakness to come. Furthermore, with inflation high (6% at the time of writing), depositors will want more than a 0.25% yield. It literally means that their money is losing value in the banks. This in turn will create further problems for banks as more and more depositors will be looking for better returns. This in summary is the major challenge facing US regional banks. Watch this story for significant developments as it has the potential to upset markets if there is growing evidence of depositors leaving banks in search of higher yields. Read the full piece here.

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