The END of Banking and Why Your Savings Account Earns NOTHING

Why does your savings account earn essentially zero while money market funds pay nearly 4%? In this episode of Through the Noise, host Robert Ollinger sits down with Duke finance professor Cam Harvey to unpack the massive gap between bank deposit rates and market yields - and why giants like Chase pay just 0.01% APR on savings deposits. Harvey explains how large banks exploit market power to maximize their funding spread at the expense of smaller depositors, then lays out four powerful forces disrupting traditional banking: fintech, private credit, stablecoins, and AI. The conversation turns to regulatory failures from the global financial crisis to Silicon Valley Bank, the case for narrow banks, and why the Clarity Act's stablecoin interest provisions could transform the entire financial system.

Transcript

SPEAKER_00 0:00

Thanks again for joining us for another episode of Cam Harvey's Through the Noise. Cam, um what I was hoping I could discuss with you today is an observation I've had recently. When I opened my first bank account when I was like 12, I remember my father put like $50 in, and we had these little books you could where you'd write down the balance, and I could watch month over month how my balance increased because there was an interest rate. It was my first introduction to compound interest. Um, but now that I'm older, uh I have a much larger balance, but it doesn't move at all month over month.

unknown 0:37

Yeah.

SPEAKER_00 0:38

Why is that?

SPEAKER_01 0:39

So and and this is remarkable and essentially unprecedented. So the average savings deposit rate across all the US banks is 0.42%, and that's an annual rate. So less than 1%. And that is the average across thousands of banks. What about the large banks? So it's better to actually look at them because most of us have accounts with these banks that are systemically important or too big to fail. And for example, if you go to the Chase uh website and look up uh savings uh deposit rate for opening a new account, it is 0.01%. So we call that one basis point. So uh this is in sharp contrast to let's say a treasury bill yield or a money market fund return, that's about 3.7 percent. So there is a massive gap between savings deposit rates like a regular savings uh account and what you can get outside in a money market fund. And you might wonder, like, why? And the banks, these large banks especially, have got market power. So they can do this because they can. And they're taking advantage of often smaller depositors, that uh it's not so easy for them to shift to a money market a fund. So this is this is regressive uh in that these bank accounts are effectively earning a negative real return. So take inflation into account. Inflation's over 3%. Uh that means you're losing that because the interest is essentially nothing. And when I say kind of market power here, it's important to realize how the banks make money. So you give them uh some deposit, uh, and then that is kind of the cost for them for the funding. And the revenue that they get, they take your money and lend it out to other consumers or corporations, and they get a much higher uh rate of return. So what this does, having a very low savings rate means the cost of funds for them is very low, which maximizes the spread between what they get and what they pay. And what they're paying is almost nothing. So this is very good for their profits to have a rate that is very, very low.

SPEAKER_00 3:49

But uh we as consumers, we should have choices. So it doesn't seem like this should be sustainable. And how how are how are we how are we supposed to respond to this?

SPEAKER_01 4:04

So I think that we need to step back and look at the big picture here. Uh the banking system is being disrupted. And it's a slow disruption that's been happening for a number of years, and I think at some point the speed of disruption will speed up. And let me go through I think four different vectors of attack. So number one is fintech, and I consider this traditional uh fintech. So if you look, for example, ten years ago, uh a very important source of business for banks was uh issuing mortgages. And if you look at the top issuers, no longer banks, it's fintech. So that part of the business has been attacked by uh by fintech. So that's number one. So number two is this idea of private credit. So the way the banking system works, you put deposits in and they're very short term because people can withdraw and and deposit, so it's very short term. But then the banks transform that short term into longer-term loans for consumers or businesses. And this mismatch causes an issue. That if it was the case that uh consumers decided to withdraw their deposits, uh, that causes an issue because the banks are highly levered. So you put some money into the bank, uh, the bank sends 10% to the Federal Reserve and then loans out uh 90%. So this means that there's a high degree of leverage. And if people withdraw, if there's some sort of run, uh it's very difficult for the bank to recall the loans that it's made. And this mismatch causes an issue. So uh over the last decade or so, there's been a very large growth in what's called private credit. So these are companies that put a fund together and loan out to uh to banks. And uh and it's a competition uh to the banks, but the key difference is that there isn't a maturity mismatch. So investors lock their money up for a certain period, and this eliminates the bank run uh problem. Um and these private credit firms are not as levered, so it actually reduces systemic risk. So think of the leverage ratio as like two to one for a private credit fund, whereas it could be nine or ten to one uh for a bank. So that that's also uh very important. Uh the private credit funds are also, to a degree, countercyclical. So in a crisis, the bank's not going to make any loans, they just stop. Whereas the private credit funds already got some capital, more willing uh to make loans in a time uh of stress. Uh some of my colleagues at Duke University are working on another dimension, and that is that uh the private credit is able to tailor a loan to the particular situation for a company. And this tailoring has got many different uh advantages. So this is uh like a like an attack, uh, in my opinion, on banks. Number three, stable coins. So stable coins uh have many banking-like features. So you send your money uh to a stable coin issuer like Circle, and uh Circle takes that money and puts it in treasury bills and reverse repos and issues you uh some tokens, which you can use. Um Circle wants to share the interest that they make on uh the treasury uh bills they invest in with the uh with the consumer. And this sharing would be way more than let's say a traditional bank would pay in terms of savings. So that's another uh source of competition and disruption. And then number four is AI, which is disrupting everything. But think of AI as uh replacing or supplementing a lot of the traditional banking functions, think about uh credit scoring, keeping track of data, analysis, where you've got many different people doing this, and AI can greatly make this more efficient. This lowers the barriers to entry into uh kind of the loan uh system. So so those four vectors are attacking uh traditional banking, and uh the system must change.

SPEAKER_00 9:36

So if I'm hearing this correctly, what I'm what I'm sensing is that the banks are actually becoming far riskier as other opportunities and other opportunities for investors, they're able to match their duration with the duration of a of a different fintech company, private credit, and of these other things. But given that we have FDIC and we have all of these other traditional aspects of the banks, do we have a regulatory issue that we need to address here where we have unregulated firms operating and sucking business away from traditional banks?

SPEAKER_01 10:12

So I actually believe the banks are less risky today than before the global financial crisis. So the leverage that the banks were taking before the global financial crisis is much rare than today. Uh indeed, I warned before the global uh financial crisis in a conversation uh to the chair of the Senate Banking Committee that he needed to investigate, his committee needed to investigate uh the traditional banks because the leverage that they were taking was like a hedge fund uh type of leverage. And that didn't make any sense given that the FDIC is insuring these banks. So uh so leverage is reduced, but I still think that the regulation of uh of banks uh is problematic. And we've seen plenty of evidence that our regulators fail. So the global financial crisis is something that we remember where all of the banks had to be uh bailed out. Um and a more recent uh episode was the failure of Silicon Valley Bank. And and that failure didn't make a lot of sense to me in terms of the regulatory uh performance. So the regulators knew that bank was underwater before it went under. Uh, and the regulators didn't do anything about it. And then when the bank failed, they were very quick to come and bail it out, which again didn't make any sense. So think of this bank, uh the the equity was worth 90% of the debt. So what the regulator should have done is to let the depositors open an account on Monday morning at the FDIC, and those that had a lower uh amount in their savings accounts and checking accounts were fully covered by the FDIC. And those that had an amount greater than the FDIC insurance should have taken a 10% haircut. So if you put money in a bank where it's more than the FDIC limit, then you are taking risk. And uh and there needs to be in a system where you take risk, sometimes it doesn't work. You buy that stock, sometimes it goes up, sometimes it goes down. So so I think that there was a regulatory uh failure. And uh again, there are solutions to this. And one solution is to approve what's known as a narrow bank. So a narrow bank, well, actually let me describe a traditional bank first. So you put some money in, 10% goes to the Federal Reserve, and then 90% is lent out. With a narrow bank, you put some money in, 100% goes to the Fed. There's no lending, there's no reason to have FDIC insurance. And this takes care of these companies that have a large need for liquidity, for float. Think of it as a payroll that you need to meet at the end of the month. And the the amount in your account is much greater than the FDIC limit. So this would be yet another attack on uh the banking system.

SPEAKER_00 14:06

So how are traditional banks reacting to this new environment? What are they doing? I I mean I imagine they're not taking this just lying down.

SPEAKER_01 14:17

Uh of course not. Um they're trying to buy time. And let me explain what this means. So what's in the news uh recently is a piece of legislation that's working its way uh through Congress called the Clarity Act. And one of the most contentious issues is uh the ability of stablecoin issuers to pay interest to the holders of the stable coins. So uh the issuer circle is very much in favor of doing this and sees it as inevitable. Indeed, uh you can see stablecoin issuers outside of the US having an advantage. If uh you use their stablecoin, you get some interest. But within the US, that's not possible. So Circle is advocating for interest, whereas the banks are saying no, no interest. And it's kind of transparent as to why, because they know that if the stable coins are paying interest, that will mean either they need to increase their deposit rates, which decreases their profit. Uh, that's one thing uh that they could do. Um, or if they can't do that, uh it really damages their franchise. So money will be withdrawn from banks and go to stablecoin issuers. And the banks make the case that this would damage credit creation in the economy. And I think uh that's only partially uh correct. It will damage credit creation via the traditional banking system. But overall credit creation will just shift from the traditional banks to the stable coin system. So if I've got a stable coin, I can lend it out. And that's exactly what happens with a traditional bank. You've got some money, you deposit it, and then the bank lends it out. But the difference with this new system, I lend it out. I get the interest. So I get paid actually twice. I get paid by the stable coin issuer some rate of interest, and then I can choose to lend the stable coin out again and make another level. So this is a very significant disruption. So we're not talking about splitting the interest on a treasury belt. We're talking uh a much greater rate of return. And this, in my opinion, will be transformational for our financial system.

SPEAKER_00 17:04

Cam, I think we definitely need to do an episode on on stable coins and how this works. Thank you for connecting the dots between me as a consumer and what I view with the innovation and the competitive landscape that's happening behind the scenes. It's it's actually quite insightful. Thank you.