Bank of England Report Says Competition on For Consumer Deposits

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A mid-year report from the Bank of England analyzes the fall of the banking system and says that in the future banks must return to consumer deposits for funding. The report is an interesting overview of what has happened in the banking system.

The Bank of England today released the October 28 Financial Stability Report which paints a grim picture of the UK and global financial system.  While the report focuses on the UK, its analysis and insights are valauble for the US as well.

While the reports says that the banking system has somewhat stabilized, significant risks remain.  These include:

Hedge Funds

The report says:

"Recently, hedge funds have also experienced additional funding pressures due to redemption requests and a risk is that these could increase. Redemptions tend to increase following a period of weak returns. In 2008 Q3, hedge funds had one of their worst quarters on record, losing a little over 10% on average (Chart 5.6). Bank contacts report that redemption requests have been high in particular from funds of hedge funds (FoHFs) in the light of their own redemption requests. Hedge funds generally operate ‘gates’ that place an upper limit on aggregate redemptions in any given quarter. A risk for FoHFs is that hedge fund gates prevent them securing the liquidity that they need to meet redemption requests. FoHFs often have liquidity lines with banks on which they could draw in such circumstances. This would transfer the need for liquidity from FoHFs to banks. Hedge fund liquidity needs may help to explain sales of relatively liquid securities such as developed-country and emerging market equities, the prices of which have fallen sharply in September and October."

In plain English, investors are pulling their money out of hedge funds.  Many hedge funds are not liquid but have bank lines which they can use to meet investor requests to be cashed out.  This puts more of a strain on banks because they must pay out the funds.  In addition, the selling we've seen in emerging markets may be hedge funds selling stock to meet redemptions.

No one seems to think we're at the end of hedge fund pressure. 

Insurance Companies

Significant risks also remain with insurance companies:

"As long-term investors, insurance companies tend to hold a significant proportion of their assets in equities and corporate bonds. The marked decline in the value of these securities in 2008 has generated capital losses for some UK insurance companies, which is reflected in rising CDS spreads and falling equity prices for the sector (Chart 5.7). Unlike banks and hedge funds, however, insurance companies generally do not employ much leverage and have long-term liabilities. So insurance companies seem relatively well placed to avoid liquidity difficulties. Risks could arise, however, if the value of insurance companies’ investments were to fall below regulatory capital requirements. This was an issue in the bear market of 2003, but regulatory reforms introduced in 2004 have reduced the likelihood of this risk by using a more risk-based capital requirement with countercyclical resilience testing. A second risk is that credit ratings of insurance companies could be downgraded. Counterparts to any derivatives trades would then increase margin requirements, increasing the liquidity needs of the insurance sector."

The BofE seems less concerned about insurance companies. 

Solution

Banks are increasingly relying on short term funding to meet their liquidity needs.  This creates risk because if the funding dries up, they will not be able to roll their debt over, resulting in default.  One of the main solutions the BofE sees to this problem is a return to customer deposits.   The Bank writes:

"Over the medium term, banks can reduce vulnerability to rollover risk by financing a greater proportion of customer lending through customer deposits. Such adjustment would result in a narrowing of the customer funding gap. But banks’ willingness to raise customer deposits will be constrained by cost. In the United Kingdom, increased competition for customer deposits has pushed up the cost of such funding."

And there you have it.  The explanation for why deposit rates in the United States have not fallen as far or as fast as the drop in Treasuries and the Fed Funds rate.  Your cash is a valuable, steady source of funding for banks. 

And it will only become more valuable over time.  Don't part with it easy and make sure you are getting the best rate on your savings or money market accounts, or CDs.


Why It Takes Two to Four Days To Transfer Funds Online

The WSJ stepped into the high yield online savings world with an article on transfer times using online banks. There wasn't a lot of new information but it was a decent recap of why it takes 2-4 days to process a transfer.

The WSJ stepped into the high yield online savings world with an article on transfer times using online banks.  There wasn't a lot of new information but it was a decent recap of why it takes 2-4 days to process a transfer.

The Journal article describes this process of someone sending a transfer from an online svings account to their online checking account. at a different bank:

"What happens during that time? ING sends transactions in batches during the day to an automated clearinghouse, which sorts them and moves them to the receiving bank in a matter of two to four hours, according to Arkadi Kuhlmann, chief executive officer of ING Direct USA, a unit of ING Groep NV, and Elliott C. McEntee, chief executive of Nacha, the Electronic Payments Association, a not-for-profit group that oversees the automated clearinghouses.

In many cases, the receiving bank gets the transfer the same day. Under rules established by Nacha, money that moves on Monday should be available by the end of Tuesday. If the transfer slips to early Tuesday morning, the money should be available first thing Wednesday morning."

Banks then wait another day or two to ensure that the funds are good and have cleared.  According to the article, depositing money into an online account took even longer- 5 business days, as ING wanted to make sure the funds were good.

Here are some tips for speeding up the transfer process:

  • Plan ahead if you know you need the money.
  • See if your money market account ccount has check-writing privileges.  Paper checks can actually clear faster than electronic transfers.  
  • Compain if the transfer takes more than 2 business days to receive money you "pushed" from another bank.  NACHA, the organization thatruns the ACH system can levy fines on banks if they hold your money for too long.

The article states that Europe has a faster transfer system and that enhancements to speed up the transfer process are under development.  That's good news for consumers.  In the meantime, if you've done a transfer and it takes more than 2 business days, call your bank and complain.  

So, if you need your funds from an online account, plan ahead.


ING Direct Bucks Rate Trends and Raises Rates on CDs and Electric Orange Account

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ING has joined the rate raising crowd. Even though interest rates are projected to drop, banks are keeping their rates steady, or even raising them. I'm not complaining.

ING Direct has bucked the prevailing wisdom like many other banks and raised the rates on severa of its certificate of deposit terms and its Electric Orange Savings Account.  While the market is still assigning a greater than 50% probability that the Fed will cut rates again after its emergency cut of 50 basis points (half a percentage point) two weeks ago, banks have mostly held their rates steady or have even increased them.  This analysis shows that savings account yields have actually held up relatively well as the market and economy has fallen apart. 

That trend seems to be continuing.  ING Direct raised the rates on its 12 month CD and its 18 month CD by 25 basis points (quarter of a percentage point)  making them more competitive.  It also raised the rate on the top tier (above $100,000 in balances) of its Electric Orange Account.   

The parent company of ING Direct, ING was recently bailed out by the Dutch goverment to the tune of $13 billion.    ING has major insurance and commercial banking operations.  The retail bank has $338 billion euros in savings and current-account deposits at the end of last year, making it one of the world’s largest retail banks.