JPMorgan To Raise Deposit Rates for Institutional Clients

I spoke too soon last week when I reported that bank deposit rates were unlikely to follow fed rate hike anytime soon. According to the Wall Street Journal, “J.P. Morgan Chase & Co. will raise deposit rates for some of its biggest clients in January, according to a person familiar with the matter.”

This isn’t surprising when you consider that US Banks currently hold over $10.7 trillion in domestic deposits, a figure found in the FDIC’s Quarterly Banking Profile released in September. This excludes $1.4 trillion in foreign office deposits and other non-FDIC insured banks.


LOANs outstanding

With those numbers combined (12.1 trillion) and only $8.64 trillion in loans outstanding, this means only about 71% of domestic deposits are outstanding loans. In other words, there is an excess of $3 trillion dollars in deposits. Here’s what $1 trillion looks like, by the way.


This leaves little incentive to pay extra interest on this excess cash. There is, however, an incentive to keep institutional clients from withdrawing their cash, which is why these deposit rate increases will only apply to operational accounts. Operational accounts are considered “sticky”, making them less likely to be removed during a crisis or lost to a competitor. Think of what a hassle it is to update all your online subscriptions when you get a new debit card. Now scale that headache to a corporate level.

Other large banks have been slow to respond and retail clients should continue to expect the same unhurried change in their deposit accounts.

WSJ: J.P. Morgan to Increase deposit Rates for Some Big Clients in January





Bank Deposit Rates Unlikely To Follow Fed Rate Hike Anytime Soon

interest rateLast month I received a call inquiring about interest rates on a money market account. I glanced at our rate sheet and informed this potential client that we were currently offering a whopping quarter of a point.

“So basically nothing?”, he asks and proceeds to hang up.

After a decade of a zero-rate environment and several months of the Federal Reserve flirting with the prospect of raising rates, it decided December 16th, 2015 to raise it’s key interest rate by 0.25%. The delayed decision came after China’s decision to unexpectedly devalue its currency, causing stock market volatility globally, and reports of a sluggish American economy.

Not surprisingly, Wells Fargo announced in a news release that “it is increasing its prime rate to 3.50 percent from 3.25 percent, effective tomorrow, Dec. 17, 2015.” Other banks reacted similarly, including U.S Bancorp, JPMorgan Chase, M&T, and PNC. Although bank loans are not directly linked to the federal funds rate, they do have a close relationship.

While the recent rate hike is a good indicator of a strengthening economy, it may not immediately be a good sign for savers. Despite the immediate adjustment to the loan rate, there is no indication that banks will pass this increase in revenue to account holders in the form of deposit rate increases any time soon.

However, this is not the case for all banks. Dan O’Neill, President of First National Bank of Omaha, raised interest rates on certain deposit products shortly after the Federal Reserve’s announcement. The quick response came as a way to attract depositors in anticipation of loan growth in 2016.

“I anticipate next year to have increased loan growth, so we will need deposits to fund those loans. It’s as simple as that,” O’Neill shared in an interview with the Omaha World-Herald.

This strategy is likely to be mirrored by other smaller banks as well as online banks such as Ally. These institutions need deposits to drive loans, while large banks remain cash flushed due to anxious investors that chose the security of a savings account in the face of market uncertainty. That security came at the cost of low interest rates. Average yields on one-year CDs, a popular product among retirees, dropped from nearly 4 percent in 2006 to 0.3 percent this month, according to

U.S. Fed Chair, Janet Yellen, echoed these concerns in a press conference held this summer, saying, “From the point of view of savers, of course, this has been a very difficult period.”

Consumers can expect a slight increase in rates on products such as credit cards, mortgages, and home equity lines of credit across the board. Any immediate expectations for deposit rate increases will be best served by smaller financial institutions.

CNBC: Fair? Banks hike prime rates, but not deposit rates 



The Consumer Financial Protection Bureau

cfpb-logoThe Consumer Financial Protection Bureau (“CFPB”) has made headlines
recently, even becoming the target of attack ads repeatedly broadcast during the Republican presidential debate hosted by Fox Business Network. The only thing more obscure than the ad is the agency itself.

It’s largely believed that the 2007 financial crisis was a result of the lack of regulation at the time. This belief led to widespread calls for financial reform in hopes of avoiding another financial crisis and increased protection for consumers.

Born out of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFPB is a consumer agency tasked with “[promoting] fairness and transparency for mortgages, credit cards, and other consumer financial products and services,” according to the U.S. Department of Treasury. Their goal, found on their website, is “watching out for American consumers in the market for consumer financial products and services.”

Despite being the brainchild of Elizabeth Warren, a former Harvard Law School professor and current United States Senator from Massachusetts, former Ohio Attorney General Richard Cordray was nominated to be the agency’s first director. Both faced opposition from Republicans; Warren, in fear of being an overly zealous regulator, and Cordray for the agency’s centralized structure.

Penned by Kentucky Senator Mitch McConnell, a letter from Republicans called for a decentralized structure and congressional oversight of its actions and budget. Nevertheless, President Obama issued a highly controversial recess appointment of Richard Cordray as director of the CFPB. Cordray, is an undefeated five-time Jeopardy! champion.

In his written testimony before the House Committee on Financial Services in September, Director Cordray claims the agency’s enforcement activity has resulted in:

  • More than $11 billion in relief for over 25 million consumers
  • Financial institutions providing more than $248 million in redress to nearly 2 million consumers
  • The handling of over 700,000 complaints from consumers addressing all manner of financial products and services

Most recently, the CFPB has turned its sights to the auto lending industry to investigate discriminatory lending practices. This in itself has caused controversy over the agency’s methodology.



San Francisco Credit Union Offers 100% Mortgage Financing

According to Housing Wire, to combat theBalancing a home mortgage rising cost of rent, San Francisco Federal Credit Union has announced a new loan program called POPPYLOAN; POPPY standing for Proud Ownership Purchase Program for You. Under this program, qualified customers would be able to finance 100% of their mortgage up to $2 million.

Coming only seven years after the housing market crash in 2008, this idea may seem a bit impetuous. However, when you take into account that some families are paying more for monthly rent than a mortgage payment, it certainly makes sense.

According to a Zillow analysis, renters can normally expect to spend 30% of their income on rent. However, the same report shows that nearly half of San Francisco renter’s income goes to rent! The disparity explains why renters have a hard time saving the money necessary for a down payment on a conventional mortgage.

Rebecca Reynolds Lytle, senior vice president and chief lending officer for San Francisco Federal Credit Union recognizes this and went on record saying, “Too many of our members have given up home of buying a home because of escalating home prices and the required down payment.”

In addition to being at least 18 years old and working in San Francisco or San Mateo County, San Francisco Federal Credit Union states, “POPPYLOAN™ eligibility also depends on a number of additional factors, such as credit scores, income, employment status, and property value and eligibility” under Frequently Asked Questions.

With the middle class shrinking, home ownership declining, and rent prices rising, it makes sense that banks and credit unions are creating products to qualify new home buyers. BBVA has its own zero-down mortgage program called HOME, Home Ownership Made Easier. However, one can only hope that history has not been forgotten and that financial institutions won’t compromise their underwriting integrity for a quick loan.

HousingWire: San Francisco Federal Credit Union unveils zero-down jumbo mortgage

Time to Rethink Standards for Student Loans

student loan

With over $1.2 trillion outstanding in federal student-loans, the issue of student debt has become a hot topic, especially in the early stages of the 2016 presidential campaign. In fact, free tuition is one of the major tenets of Democratic candidate Senator Bernie Sanders’ agenda.

However, according to the Wall Street Journal, “A recent surge in the share of Americans defaulting on their student debt is generating support for an obvious but controversial idea: restrict who can borrow for higher education.”

There are currently no underwriting standards when it comes to the federal aid in the form of student loans. This is surprising when you consider that loans are generally priced under a risk-based pricing methodology. When it comes to student loans, there are many factors that could and should be considered, especially performance-based lending. While some may argue that this restricts a person’s ability to get a degree and, presumably, a higher income and quality of life, the truth is it gives the borrower a sense of personal responsibility.

In general, your first mortgage payment comes due one full month after the last day of the month in which your mortgage closed. For auto loans, depending on your financier, you first payment may be 30-45 days after closing. When it comes to student loans, many programs offer a grace period of 6 months after graduation. In other words, it can be more than 3 years until you make your first payment. With such a far off date, it’s easy to get apathetic about grades, especially when the money will keep coming regardless of  performance.

Another benefit to performance-based lending is it keeps people who are unlikely to complete their degree from taking on debt. You generally don’t keep investing in a company whose performance has gradually been declining. Similarly, in theory, you shouldn’t keep financing a poor-preforming student, at least not at the same rate.

Student loan debt is not just a legislative issue. An easy solution that doesn’t seem to be publicized is just simply not taking on debt to pay for school. Out-of-state tuitions can be 3 to 4 times more than in-state tuition while community college tuition can be a fraction of in-state tuition. Many companies also offer tuition reimbursement, making it possible to get your education subsidized by your employer.

With the price tag of college tuition steadily rising, one should consider the full cost of a college degree and their willingness to pay those loans back that made it possible to attend. Absolutely everyone should have the opportunity to get an education, but they should also be held accountable.

WSJ: Should Anyone Be Eligible for Student Loans?