Have you tried to borrow money lately from a bank? They want your credit to be downright impeccable; even then, it is likely that you will pay fairly robust interest.
Automobile loans are different. If you miss a few payments, the bank will hire a repo guy or gal to steal the car back; then the bank will resell it and maybe book a slight loss or a slight gain. Houses used to be different, but mortgages are not as easy as before the Credit Debacle. Banks are hip now to the fact that real estate can actually decline in value.
But here’s the real skinny on banks: They can borrow money at the Fed’s discount window for next to nothing — the current rate is 0.75%, or 3/4 of one percent. Then the banks turn around and loan the money out at 6 or 7%. In honest days, institutions could make maybe 2% on the spread between what they loaned out and what they credited to savers. Now? Holy mackerel! Do the math. That’s a lot of interest.
Banks are not doing a great job of lending to stimulate the economy or create jobs. Many of them seem to be lending to the highly creditworthy at high rates and paying themselves bonuses out of the nice high spreads. Banks are certainly not paying out high interest yields on savings accounts and certificates of disappointment.
Did I mention that the discount window is essentially us taxpayers?
The good thing about this — maybe — is that people are beginning to save money. In the short term, this may not be good for the economy; in the long term it could be terrific. The current savings rate is around 4%, but it could move as high as 10%. Banks may lose their best friends, who may find better places to save — like with financial planners. Did you know that your broker-dealer almost certainly has a bond inventory? And did you know that your broker-dealer probably has CDs for you to sell? You might check out alternative savings plans. If banks in your neighborhood are paying a low CD and saving rates, get busy and get your BD to help you advertise in the Sunday paper. How about changing the blog’s headline to Banks Lose, Financial Advisors Win?
Have a sensational week, and do good things for your customers.
Check out more blog entries from Richard Hoe.