Fed’s rate policy leaves no relief for Main Street banks
By Camden R. Fine,
WashPost
Published: August 25
After nearly a decade of living inside the Beltway, I have learned not to be surprised by much in Washington. But I was astounded this month when the Federal Reserve announced its intention to keep interest rates at zero percent for at least the next two years. I kept staring at that number, 2013, assuming that it was a mistake. Surely the governors meant 2012, which would have been bad enough, I thought. But at least 2013? What is going on, I wondered. Why put a fixed date on it at all? Now their hands are really tied!
I have been a community bank owner and was president of a bank that served hundreds of community bankers for more than 20 years. I have always known that the model of community banking is different from that of Wall Street banks. Unlike Wall Street banks, which make their money based on volume and transaction fees, community banks make their money the old-fashioned way. They pay their customers interest on their hard-earned savings, they lend those deposits back into their communities to small businesses that create jobs, and they price those deposits and loans to make enough on the difference to pay their employees and utility bills, and maybe even to purchase a scoreboard for their local high school football team.
That is, until now.
Now the Fed is pricing their deposits. Now the Fed is setting the spread. With nearly zero percent rates and slack credit demand, how are community banks supposed to make a viable margin on their funds? Community banks are swimming in liquidity as depositors pour their savings into their local banks in search of safety and security. Most community banks are holding short-term investments because they figured that rates would begin to rise in the next 12 months or so. After all, rates have been near zero for almost three years.
(More here.)
WashPost
Published: August 25
After nearly a decade of living inside the Beltway, I have learned not to be surprised by much in Washington. But I was astounded this month when the Federal Reserve announced its intention to keep interest rates at zero percent for at least the next two years. I kept staring at that number, 2013, assuming that it was a mistake. Surely the governors meant 2012, which would have been bad enough, I thought. But at least 2013? What is going on, I wondered. Why put a fixed date on it at all? Now their hands are really tied!
I have been a community bank owner and was president of a bank that served hundreds of community bankers for more than 20 years. I have always known that the model of community banking is different from that of Wall Street banks. Unlike Wall Street banks, which make their money based on volume and transaction fees, community banks make their money the old-fashioned way. They pay their customers interest on their hard-earned savings, they lend those deposits back into their communities to small businesses that create jobs, and they price those deposits and loans to make enough on the difference to pay their employees and utility bills, and maybe even to purchase a scoreboard for their local high school football team.
That is, until now.
Now the Fed is pricing their deposits. Now the Fed is setting the spread. With nearly zero percent rates and slack credit demand, how are community banks supposed to make a viable margin on their funds? Community banks are swimming in liquidity as depositors pour their savings into their local banks in search of safety and security. Most community banks are holding short-term investments because they figured that rates would begin to rise in the next 12 months or so. After all, rates have been near zero for almost three years.
(More here.)
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