An unfair deal?

Personal Finance / analysis

Banks may be offering about -1% less for term deposits now than they have historically, when compared to the wholesale cost of money. And the RBNZ is calling them out on it

10th Oct 22, 11:15am by David Chaston

The latest RBNZ review on monetary policy and the level of the Official Cash Rate brought this note from them:

The Committee expects that higher wholesale interest rates will be reflected in higher retail interest rates, particularly deposit rates, as banks compete for funding.

It seems a fair comment to make.

The margin between the average retail term deposit rates and wholesale rates has never been lower over the past 15 years.

While there isn't any financial law that says term deposit rate offers need to exceed the cost of wholesale funding, over this same period it has for most of the time. That history shows it has exceeded it by about +1% on average for both the six month TD offers (actual = +0.937%) and the one year TD offers (actual = +1.07%).

At present, average six month term deposit offers are -0.8% below the cost of six month wholesale money, and the average one year term deposit offers are -0.4% below the cost of one year wholesale money.

If both were +1% above the wholesale benchmarks, six month term deposit offers would currently be offering 4.40% pa and one year term deposit offers would be offering 5.20% pa. The highest offer from any main bank is now a full 1% pa lower than that.

Savers are motivated by higher term deposit interest rates. As they have risen recently, there has been a sharp shift from low or non-earning bank accounts back to term deposit accounts. Savers will shift when incentivised by a higher interest rate.

On the other hand, banks are commercially motivated and incentivised to keep offers low. Only competitive pressure will raise them. Some of that "competitive pressure" comes from the wholesale cost of money, some comes from the opportunities to lend, and some comes from savers who are prepared to shift institutions for a better rate. It is this last motivating factor that is the weakest. Banks rely of their 'replicating portfolio' - savers too lazy to make the effort to switch.

It is not as though there aren't higher offers from banks - they are just from challenger banks rather than "main banks". Savers have always seemed reluctant to support challenger banks in sufficient volume to cause main banks to change their behaviour. To be fair, because all challenger banks are small, and between them have less than a 10% market share, their capacity to take a volume of fund flows sufficient to affect the main banks isn't great. The main banks can rely of this incapacity.

Despite all that, the offers on the table at present are unusually low. The RBNZ is right to call them out. If the main banks can ignore the pressure from the challenger banks, will they also ignore the signal from the RBNZ?

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51 Comments

by Audaxes | 10th Oct 22, 11:37am 1665355035

If bank shareholders are being imposed upon to put up more capital banks will seek to penalise the weakest and largest underwriter of bank loans - namely unsecured depositors.

Past time a depositors lobby association is formed.

by Solid_Granite | 10th Oct 22, 11:59am 1665356384

Or deposit insurance. Weren't they bringing that out sometime next year?

by Justa comment | 10th Oct 22, 12:12pm 1665357171

Deposit guarantees in Oz saw lower TD rates (they still have very low TD rates), they could fall 0.5 to 1.0% following govt guarantee next year. Maybe.

by Solid_Granite | 10th Oct 22, 12:31pm 1665358311

Good. In this current environment we need to encourage saving, and discourage investing.

by MisterB | 10th Oct 22, 1:49pm 1665362988

How does having a lower Term Deposit rate encourage saving? TD rates will likely come down as the cost to insure is rolled into the product

by Solid_Granite | 10th Oct 22, 4:05pm 1665371108

To be honest, if we're facing an upcoming recession people won't be too worried about return. More about safety of their deposit and insurance is a good encouragement.

Besides, savers aren't necessarily looking for any return at all. I understand there's inflation risk to be concerned with but I believe this will be addressed in future. Inflation risk bleeding into ordinary life is a big concern, at least to me. Turns ordinary people into investors. Sometimes emotionally, out of fear of inflation. You don't invest emotionally, bad things happen.

by Spiceeh | 10th Oct 22, 2:08pm 1665364126

But who has the money to save? The poor certainly don't and the middle class is now are going to be struggling to hold onto the homes. The only people who will continue to save will be the rich.

This is an essential watch right now. Gary Stevenson talking realistically about the global economy. https://youtu.be/ViY-zI3b5JQ

by treadlightly | 10th Oct 22, 5:11pm 1665375065

Household net savings can only come from government budget deficits as banks can only create credit and debt in equal measure and NZ runs current account deficits also which are a financial loss to us. Government debt is the private sectors accumulated savings of the governments currency. (Sectoral Balances).

by Eschaton | 10th Oct 22, 6:46pm 1665380806

Government debt may also be held on department's balance sheets, or purchased by central bankers. Or purchased using leverage?

by treadlightly | 10th Oct 22, 8:20pm 1665386434

Government budget deficits just mean that the government is putting more money into private bank accounts that it is taxing back again and then cancelling and which then leaves a surplus of money in the private sector. Whoever holds the governments bonds doesn't change this fact as they are not financing spending as the spending must happen before the borrowing. Government spending creates both an asset and a liability for banks who receive the governments payments as reserves but also then have to create the deposit in the payees account.

A couple of links for explanation below.

https://clintballinger.com/2018/11/13/decouple-spending-from-bond-sales/

https://www.levyinstitute.org/publications/can-taxes-and-bonds-finance-…

by J.C. | 10th Oct 22, 1:03pm 1665360213

Past time a depositors lobby association is formed.

Maybe the first step is to get wider public understanding that being a depositer means that you're actually a creditor that's low on the totem pole.

by Retired-Poppy | 10th Oct 22, 11:40am 1665355243

I have a decent sized 4.25% (5-year) TD maturing on 6-Jan. Id be surprised if I'm not presented with rates of 5% or more this time round, and for shorter terms too.

by Justa comment | 10th Oct 22, 12:10pm 1665357047

That was an excellent TD over the last 5 years, and you will be renewing at a great time. Well done.

by Retired-Poppy | 10th Oct 22, 12:18pm 1665357494

Rabobank 🏦

by Justa comment | 10th Oct 22, 12:23pm 1665357795

Yes Rabo has great rates for savers, right now the big banks are trying to get them out of the savings market as they only offer limited services and therefore have low overheads. Will be interesting to see how this appeal goes next year.

by J.C. | 10th Oct 22, 1:07pm 1665360432

That was an excellent TD over the last 5 years, and you will be renewing at a great time. Well done.

Not bad but a little behind gold which has returned 66% in NZD over the past 5 years (as of today). Price just gone past $3,000 too.

by Retired-Poppy | 10th Oct 22, 2:11pm 1665364307

You win 💰

Nice!

by J.C. | 10th Oct 22, 2:26pm 1665365187

I'm more interested in how it's performing as an alternative for currency. Actually, in currencies like AUD and USD, its performance is less compelling. As for JPY, wowser. 24% in past 12 months.

Incidentally, going out to 5 years, increase in JPY to gold is almost exactly the same as NZD -- 69% (JPY) vs 66% (NZD).

by Carlos67 | 10th Oct 22, 2:56pm 1665366979

Its a question of how much you had invested in it, not the rates.

by J.C. | 10th Oct 22, 3:21pm 1665368488

It hasn't nothing to do with it. The relative appreciation in NZD doesn't change regardless of the fiat equivalent.

Bloomie reports that gold is flowing East.

The Gold Market’s Great Migration Sends Bullion Rushing East https://www.bloomberg.com/news/articles/2022-10-09/gold-is-heading-east…

by JohnfromtheTron | 11th Oct 22, 8:38pm 1665473929

Nice. I've been keeping an eye on the 5 year rates but they haven't moved for a while. I'm guessing they are not going to go much higher as 5 years down the track the OCR should be back to some kind of normal? Unless there are other factors that will drive them up?

by realterms | 10th Oct 22, 1:10pm 1665360615

Isn't this just the effect of FLP in a low-volume market? The banks don't need to raise much via deposits and so they don't have to offer good rates to do so. Bit rich of the RBNZ to complain about it when they're dithering about turning off the FLP taps.

by keithwoodford | 10th Oct 22, 2:38pm 1665365914

Correct. The banks have loads of FLP money for which they only pay the FLP rate (which is the OCR rate) but which is essentially long-term. Why would the banks want to pay the same or more for money which is shorter term? The RBNZ needs to look at themselves for the solution. And it is one reason why the OCR needs to move closer to wholesale rates.

KeithW

by Justa comment | 10th Oct 22, 12:15pm 1665357322

Exactly, The banks are saying nothing and smiling re the FLP.

by Audaxes | 10th Oct 22, 2:34pm 1665365655

And it's collaterised RBNZ lending, most probably with AAA rated RMBS.

by lastlegs | 10th Oct 22, 2:17pm 1665364640

so we are getting robbed as customers and taxpayers,dont call the cops,its an inside job.

by EdwardD | 11th Oct 22, 4:32pm 1665459125

I'm glad someone commented on this. I have a TD expiring next month and won't be renewing for a long term. Until the FLP $s are a thing of the past, banks have no incentive to pay better TD rates. It's a bit rich that the Reserve Bank expects otherwise.

by Audaxes | 10th Oct 22, 3:15pm 1665368105

Banks create deposits when a new loan is issued.

Banks don't take deposits and they never lend money. They are in the business of purchasing securities. When one gets a bank loan, the loan contract is a promissory note. The bank purchases that contract from the borrower. Now the bank owes the borrower money and it creates a record of the money it owes, which we call deposits - source

In the case of FLP a securities repurchase agreement (RP) is undertaken between the two parties.

by Crazy Horse | 10th Oct 22, 11:48am 1665355731

Banks in NZ and around the world are just another business ......they will always go to the "extreme" to maximise profits for return on shareholders funds.

Do you really think the Board sits around worrying about what savers are receiving on their term deposits/saving accounts.

In fact, savers/term deposits are a liability on their balance sheet, as they owe that money back to the savers, so of course they will minimise any interest paid on that money.

Sorry to break this to the general populace out there, as they will lend money "willy nilly" when the going is good, as up to 2021 but when they can see the "gravy train" has come to a stop ie 2022 and people just can't afford to buy houses anymore, that's when they raise interest rates. As they have to keep their cashflow going to get return on their capital - and most importantly a good profit and returns to shareholders.

The NZ banks make me laugh, as they are always saying how "robust" they are and yet they do not offer insurance in NZ for savers funds - so if your bank goes "belly up" so does your savings - gulp.

by J.C. | 10th Oct 22, 1:10pm 1665360643

In fact, savers/term deposits are a liability on their balance sheet, as they owe that money back to the savers, so of course they will minimise any interest paid on that money.

Yet banks continue to push the virtues of savings in their marketing and brand campaigns. How they are allowed to contunue to do this under advertising standards is a mystery. I guess the disclaimers in small fonts on TVCs and marketing materials is enough to protect themselves.

by Justa comment | 10th Oct 22, 2:21pm 1665364918

Exactly, is 'Fastsaver' @ 0.65% misleading by name ? (and by rate)

by Pa1nter | 10th Oct 22, 11:49am 1665355769

Do central banks want money to be saved these days? I thought money was only to be used.

by ACB | 10th Oct 22, 12:14pm 1665357253

There is a good reason why banks should be willing to pay more for retail deposits than wholesale funding, notwithstanding the material cost of maintaining such deposits. It goes back to funding stability ratios (sticky retail deposits) and the regulatory penalties that arise from relying too much on wholesale funding. But yes, the FLP is almost certainly to blame here, a taxpayer subsidy to banks effectively at the cost of retail savers.

by Justa comment | 10th Oct 22, 12:19pm 1665357570

yes they used to have to hold a certain amount of NZ TDs to qualify for some of their OCR funds. Again, the FLP has changed this. The sooner the FLP is costing 4% or more the better for savers. I do however think the FLP a good idea for NEWbuild housing stocks.

by Averageman | 10th Oct 22, 12:20pm 1665357603

Agreed. Govt should be calling out that it will not be extended when it runs out at the end of the year. Banks will have to sacrifice some of the obscene profit levels to secure retail deposits.

by taimaiakka0 | 10th Oct 22, 12:16pm 1665357400

Does FLP han any role in it.

by Audaxes | 10th Oct 22, 11:00pm 1665396048

No.

by murray86 | 10th Oct 22, 1:18pm 1665361094

Perhaps the trick would be in putting limits on where banks can get their capital from to do their business? During COVID the Government made a lot of money available to the banks very cheaply, and they pumped housing. There is no regulated, practical limit as I understand it, to just how much credit banks can create when lending into any market. Which means they can do as they please with impunity to all intents. If the banks need to attract deposits to produce the capital they require, wouldn't they then need to make it more attractive to depositors?

by J.C. | 10th Oct 22, 1:36pm 1665362185

During COVID the Government made a lot of money available to the banks very cheaply, and they pumped housing.

In the NZ context, this is a primary vehicle for how base money is converted to broad money. Ex-BoE Guv Mervyn King has well covered how this works.

by treadlightly | 10th Oct 22, 5:25pm 1665375928

Deposits are not capital, capital is a banks own funds made up of shareholder funds and retained profits. Banks need deposits to maintain their reserves.

by J.C. | 10th Oct 22, 6:00pm 1665378012

Deposits are not capital, capital is a banks own funds made up of shareholder funds and retained profits. Banks need deposits to maintain their reserves.

Banks don't lend out deposits. You know this.

by treadlightly | 10th Oct 22, 6:42pm 1665380565

They need to maintain their deposits relative to lending though or their reserves will all end up in the settlement accounts of the other banks and they will no longer be able to make their interbank payments. Deposits and reserves go hand in hand even though they are not part of lending but of the payment system.

by Audaxes | 10th Oct 22, 11:15pm 1665396936

In the past RBNZ has engaged in FX swaps with local banks' foreign London subs to create local NZ bank RBNZ NZD reserves and foreign USD reserves for NZ.

by MisterB | 10th Oct 22, 1:46pm 1665362768

Don't you need to do the same analysis on fixed home loan rates though David? Essentially two sides to the same coin, with obvious term mismatches of course. The 12 month fixed rate relative to 12m swaps is surely MUCH lower than historic norm?

by realterms | 10th Oct 22, 1:58pm 1665363495

They did this recently. Last week?

by Justa comment | 10th Oct 22, 2:26pm 1665365199

They are also lower due to the FLP. The banks are offering 5.25% 1 yr to existing (valued) customers, this is only 1.75 above OCR. Historically this rate would be over 2% above OCR, long term av 2.3% I think.

by MisterB | 10th Oct 22, 3:04pm 1665367483

What is relevant is the HL rates relative to wholesale, not relative to OCR - the margin above wholesale is very small, 12m wholesale rates as as high as they were in December 2008 (4.6x%) when the 12m HL rate was 6.9% and 12m TD rate was 5.0%

The FLP is still a relatively small percentage of funding. The banks have $335bn+ in home lending, most on a 12 month repricing schedule and FLP is currently <$15bn right, so only a small chunk, and a few banks said they were using some of the FLP money for business lending, others said it was for new builds etc.

I get a sense that people overestimate the impact of FLP on fixed HL rates.

The low levels of new lending look to be forcing the banks to keep fixed HL rates low and therefore, swings and roundabouts, deposit rates.

by WellingtonInvestor | 10th Oct 22, 2:29pm 1665365350

That fact that kiwibonds look so attractive compare to what banks offer, when banks have not government guarantee, shows the banks are just making hay while the sun shines at the moment.

They need calling out on it, and IMO the media also need to call them out on it. If they are putting up peoples loans, then they should be putting up savings rates by similar amounts

Also the FLP needed to be scrapped yesterday, it is not needed and potentailly we are subsidising the banks with cheap money

by blobbles | 10th Oct 22, 2:36pm 1665365799

In breaking news, the banks are milking it.

In other breaking news, the sky is blue and water is wet.

by Kiwi Tim | 10th Oct 22, 3:53pm 1665370428

In other news, RBNZ produced the milk.

by redcows1 | 10th Oct 22, 5:37pm 1665376623

At the same time telling wage earners to pull their heads to hold inflation.