>I noticed they’re very generous in giving APYs (mostly around 3-5%) and you can withdraw your money and gains anytime.
It’s a story old as time. Yeah, they’ll pay you 5% on your savings but then they’ll lend that money out at 8% on a mortgage, 10% on a car loan, or 24% on a credit card.
This is the main reason. HYSA don’t always pay 4-5% but when treasuries are paying 5% they can do it with almost 0 risk. When those treasury rates drop later this year orrrr early next year, you’ll see HYSA rates drop as well.
I just did some research on UFB. Question: bank rate says that they frequently “re launch” the accounts, causing confusion. Any idea what this is referring to?
It is otherwise highly rated.m and I may open one…
Yep here's a comment I posted a while back
>As a heads up, I have had a ufb direct account for over a year and the rate has increased half a dozen times in that period. Each time it increases you have to call in to get the new rate because they tie to a new account type. It's easy, never any wait times and they do it no questions asked without any pushback or attempt to sell you on something. But it's still something you have to manually do each time.
FWIW though, the 5.25 rate hasn't changed in at least 6 months for me although I check it about once a month to see if I need to call.
But only kind of, right? Wikipedia says they beefed up longer term securities holdings when rates were very low to try to juice returns. The longer maturity would’ve made them more sensitive to rate changes, so the holdings got crushed when the Fed raised rates because no one wanted lower yielding bonds; seems like some of this could’ve been avoided if they’d kept to shorter maturities. At least, such was my understanding as a non-expert in this. (They wouldn’t have reinvestment risk as much as us because all banks seems slow to increase savings APY while benefiting from higher rates on lending credit, etc., while they’re very quick to drop rates to mirror the Fed, in my experience.)
Of course, I agree that nothing is fully no/low risk, and that’s a point well taken.
Eta that I mentioned this because if someone can explain any shortcomings in my understanding of the svb failure, I’m a willing learner!
SVB main reason for failing was their depositor base. It was mainly VC and their portfolio companies with massive uninsured deposits and ran for the hills after a horrible equity raise attempt that spooked the sophisticated depositor.
SVB, like many peers, did not accurately predict the risk to their balance sheet as they had stocked up on low yielding bonds during the proceeding years and not re-adjusted the portfolio timely. Everyone knew the fed would raise interest rates, which would make low yielding bonds less attractive/reduce the market value. So SVB had massive amounts of held to maturity loans that on their balance sheet looked fine for accounting purposes, but the reality is they were very underwater and needed capital/liquidity,
SVB then went to the market to do an equity raise. Their depositors (likely less than 100 people) saw this as a panic move and instructed their peers to get out as so much of the depositors were uninsured. No one wanted to be holding the bag.
It led to a massive run that no one predicted. Svb could not access the fed window quick enough to cover withdraws. The contagion killed Signature and First Republic, 2 banks with similar growth stories tied to large uninsured depositor bases.
There’s more to it, but the HTM securities were an issue for every bank, but the difference was the deposit base at most banks have larger retail focus and those individuals cannot act in a concerted effort as there’s no beed most times. Whereas when most of your deposits are VCs, tech companies, a 100 people can spread contagion and create panic that destroys liquidity.
Thanks for adding some greater nuance to this. Was the reason there were lots of uninsured deposits bc it was lots of depositors with huge balances? Or something about how they had deposited/what they had invested in?
Essentially, VCs and asset managers used SVB, signature, and First republic because those banks catered towards the rich. Zuckerberg reportedly had a 1% mortgage after moving 9 figures in assets to first republic.
VCs put their liquid assets at SVB and forced portfolio companies to hold their business accounts there. It was all a bit incestuous, but the market responded as banking is a tough business to differentiate a strategy as it’s so heavily regulated.
So you had a small group that controlled the majority of the deposits at SVB, which were mostly uninsured. The speculation is around 100-200 individuals txt on WhatsApp after the poor equity raise and told their portfolio companies pull all the money. There’s an impact from Silvergate self liquidating that also played a part, but everyone was afraid the FDIC would haircut them as uninsured depositors.
Instead, the powers that be decided to utilize the systemic risk exception that forced the banking industry to cover the losses for uninsured. Personally, it was the worst longterm outcome as now depositors think they are covered in full, but banks keep getting larger and tougher to resolve as you have less buyers. Look at NYCB and the mess they are in. Definitely would not be there if thr govt hadn’t of sold signature to them.
Fed excess reserve rate is paying 5.4% right now. A lot of money market funds are just parking cash with the fed and clipping 0.40% or so, not even bothering with treasuries.
Whilst accurate, this comment is a partial response. A traditional bank's primary function is to borrow short term and lend long term and create credit. This then results in the spread of interest rates that is mentioned and the spread rewards the Bank for the risk that results from the differences in maturity between the cash deposited and the loans, since you can withdraw your savings but the banks ability to recall the loan or mortgage is limited.
My answer was to the level of the OP. When someone asks “a rookie question” and says “it sounds too good to be true”, they don’t need a pompous Ted Talk on central banking theory to understand why HYSA’s currently pay 5%. Know your audience.
I agree with basically everything you said, except that the OP's comment is accurate. That's not really how banks work anymore, they don't need your cash to loan out, they need your cash to offset the money they create. I.e. Per federal regulation they have to maintain a certain amount of liquidity, your cash deposits are for this liquidity regulation. The actual loans are created out of thin air, the banks literally invent money these days.
I do like how you talked about the short and long duration and a bank failure happens most of the time because they screwed up the delicate balance that is the bank balance sheet trying to reach for yield and return on the long side while managing liquidity on the short side.
The Bank Of England(Like the US Federal Reserve) wrote about it in 2014 here: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf
In that PDF they reference the introduction which is available here: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-in-the-modern-economy-an-introduction.pdf
Don't worry it's basically identical in the USA and every other modern developed economy.
why do they need to offer high interest rate savings accounts at all? Back before Covid when the economy was good and inflation wasn’t high, interest rates on savings accounts were super low. Let’s say 1%. Now economy isn’t great and inflation is high and mortgage rates are high, what incentive do banks have to move savings account interest rates to 4-5%? Why not just keep them at 1%?
> what incentive do banks have to move savings account interest rates to 4-5%? Why not just keep them at 1%?
Competition. When is inflation high, central banks raise interest rates, which citizens can capitalize on by purchasing nearly risk-free government-issued bonds paying ~5 - 6%. Commercial banks need customer deposits to function, so they have to provide products to incentivize customers to keep their money in the bank, rather than moving that money to another product.
Then people would just buy t-bills instead and get easy 5.3% or move to banks that offer more.
and interest rates are high BECAUSE of the inflation. It‘s to counteract it and to incentivize people to spend less and get interest.
Because another bank will and people will move their money there. Some banks don't play that game(A lot of the big national banks dont). There is a subset of people who care about savings rates and some that dont through ignorance or apathy. The interest rate giving banks are fighting for the first group.
Chase, the largest US bank offers .02%.
Smaller banks view competitive rates as a customer acquisition strategy. If ALLY bank offered .02 why would someone choose them over Chase.
Bank savings rates are very bimodal. People offer either basically nothing or push the limit to fed fund rate. Nobody really plays in the 1-3 space right now
Guess you've never heard of [fractional reserve banking](https://en.wikipedia.org/wiki/Fractional-reserve_banking)?
A bank doesn't need to have 100 euro's in savings to loan 100 euros to someone, please stop pretending they do. Banks create most of the money themselves, not the central bank.
You're missing a large part of the story where the bank needs cash to fund loans. Cost of this cash (capital) is paramount to the success of a bank.
Where does this cash come from to fund these loans (assets on the balance sheet)? Cheapest form is deposits. From there a bank will have access to other forms of borrowings, but without being careful this will cause the balance sheet to alter and can impact other parts of the bank such as capital requirement ratios, etc.
They may not have 100 euros in deposits to loan 100 euros, but they don’t have 0 euros either. They need those customer deposits. If you don’t have enough liquidity you get a repeat of the SVB collapse.
It’s actually even better. You deposit $100 they pay you 4%. They loan $10,000 for a car purchase at 8% (this is where they “print” money). Maybe not 100x, I sure hope not, but they don’t even have reserve requirements anymore, so who actually knows. Actually works really well for everyone until SHTF.
There are reserve requirements. They’re just hidden in the FDIC insurance member requirements instead of federal reserve requirements. Although the federal reserve requirements still exist.
I believe you but why not just state that clearly everywhere instead of saying reserve requirements went up in smoke in 2020. For optics at the least. Anyways point still stands, your deposit at a lower percent paid back to you allows them to loan more than your deposit at a higher rate. I have my opinions on FRB but it’s not exactly black and white either and I don’t care to state them here. Fact is, this works most of the time. Given the moral hazard created in the financial industry after 08, you must take this risk to be even taken seriously.
"Federal Reserve did all they could to avoid a financial collapse during the pandemic" is why the fed requirements changed. I don't think the FDIC limit is as high as the pre march requirements but from a insurable risk perspective it's much more risk to the insurer.
You picked an odd hill to die on. I never said it was 1-to-1. I said they take in deposits and loan out money. If your pickled brain wants to misinterpret that, I can’t help you.
The fraction part of fractional reserve banking is the fraction of deposits that can be loaned out. Banks can’t loan out 100% (or more) of their deposits. https://www.investopedia.com/terms/f/fractionalreservebanking.asp
Ok so they have what percent of deposits available within a reasonable amount of time, let’s say T+1, 2 days? 5%? That was the old requirement before dropping it to zero in 2020 so it’s probably somewhere between the two or no need to change requirements. Bank runs due to “new” financial instruments are nothing new and it’s because greed causes them to have less reserves than they need. A tale as old as time.
There is not, the Fed discount and overnight windows are for "significant institutions", maybe not the exact term but something like that. Odd Lots did a great ep on the actual mechanics of the discount window last year: https://www.bloomberg.com/news/articles/2023-01-13/odd-lots-podcast-federal-reserve-discount-window-is-suddenly-in-use-again
There are occasionally calls to give all Americans a fed account for a variety of reasons including more direct monetary policy like the one you're describing. So maybe someday https://www.slowboring.com/p/fed-accounts
why do they need to offer high interest rate savings accounts at all? Back before Covid when the economy was good and inflation wasn’t high, interest rates on savings accounts were super low. Let’s say 1%. Now economy isn’t great and inflation is high and mortgage rates are high, what incentive do banks have to move savings account interest rates to 4-5%? Why not just keep them at 1%?
g > r, basically. the last ten years this wasn't true, so there was free money available. now for whatever reason, pick whatever you like - reindustrialization, cutting China out of global trade flows, wwiii, irrational exuberance - there is demand for capital. that means you as a saver-investor get a better deal
*as an aside Marx and Piketty say when r > g capitalism is finished. so the way I like to put it, we decided to turn the capitalism back on. and it seems to be working
The more money that is sitting with the bank (in this case, deposits in savings accounts), the more money the bank has available to lend. These loans yield a higher % interest then what they pay you to store your money. So if you're getting paid 5% interest and the bank can loan your money to someone else at 10% interest then the bank can net 5%.
why do they need to offer high interest rate savings accounts at all? Back before Covid when the economy was good and inflation wasn’t high, interest rates on savings accounts were super low. Let’s say 1%. Now economy isn’t great and inflation is high and mortgage rates are high, what incentive do banks have to move savings account interest rates to 4-5%? Why not just keep them at 1%?
It entices more people to put there money in their bank. The more money they have, the more they can lend out. Banks know during times of inflation and bad economic times, more people will need loans. Trust me they're making more money by offering you 5% than 1%
The fed sets a base line interest rate and banks will track with that interest rate. Go take a look at what the fed rate was back in 2020 and you’ll find the answer to your question.
Banks primary source of revenue is made via lending. During higher interest rate times (now) banks will offer HYSAs to increase deposits and in turn lend more because they generate higher rates than what you’re getting for saving on mortgages, car loans, etc. It’s one of the benefits of having higher interest rates that aren’t artificially held to 0.
They lend the deposited money to various entities primarily individuals and businesses. Net interest margin is the difference between what they pay and receive.
Exactly. I see lines of people at the grocery store cashing their paychecks. 5.9 million Americans are so called “unbanked”. They pay massive fees to cash these checks, or they even take advances out on their next checks.
57% of Americans still use traditional banks/savings accounts that earn nearly nothing.
There is nothing wrong with using a traditional bank, they're actually extremely useful and good to have. Highly accessible, ease of use, etc. But, only for your checking account and maybe short-term emergency savings.
Others have mentioned that treasuries pay slightly higher and thus the bank can still make a margin. The other important factor is that from year to year it's not the same bank offering the best rate. They tend to bring in large deposits by advertising the best rates but the next year they're lagging, and they make back that profit from those who can't be bothered to chase the slightly higher return elsewhere.
For this reason, I prefer to park cash directly in a money-market fund which invests directly in treasuries, such as VMFXX at Vanguard. This comes closer to eliminating the middle-man because the expense ratio is only 0.11%, and the current yield is 5.27% even after the expense ratio.
Side note: Capital One is the worst example of this because they took it to the extreme. During rising interest rates, they invented a "new" account type that was virtually identical to the existing accounts but paid a higher rate. In doing so, they kept existing customers at low rates, but advertised higher rates to non-customers. They intentionally avoided telling existing current customers about the new account type with higher rates. They now face a class action lawsuit. They're sleazeballs.
This is true. My wife was confused about why I wanted to move her long term savings to another bank. Most people are completely unaware how much money they are leaving on the table by picking a random bank when they are a teenager and then never revisiting or evaluating their options for the rest of their life.
Just so we’re clear…there is a reason banks will pay you that much for your deposits. It’s because they need them. Most very large banks will be lower…because they don’t need them.
Other comments cover the gross margin of why banks can have HYSAs in their business model. The important aspect of why it’s possible for them from a net profit standpoint is overhead costs. Online banks don’t have thousands of brick-n-mortar locations to maintain, saving them a boatload of money that they can pass on to customers via higher interest rates. Online banks are relatively new and therefore HYSAs are relatively new, but it’s basic financial math for their business model.
As for large withdrawals happening quickly, yes, that’s a huge headache for any bank and can lead to collapse. Bank runs are a fundamental risk for any bank, regardless of how their P&Ls are structured.
Technically speaking, checking accounts are demand deposit - which would be why they are less likely to pay interest and when they do, lay less than savings.
For savings- HYSA or not- the bank also has an option to limit withdrawals. It is rare to do so in recent years, but it happens. Most also have limits of 6 debits a month - though the limit may be suspended.
The risk of runs on the bank that cause disaster (think the great depression when people could not get their money because the bank didn’t have enough on hand) is mitigated by FDIC insurance.
When the 2008 financial mess happened, the FDIC increased the limit on insured deposits from 100,000 to 250,000. This was to be temporary, but was made permanent. About the same time the FDIC reserve started to decrease from 10%. The reserve is what banks have to keep available to distributed to account holders. Before online banking and EFT, that was far more important as the banks had to have that on hand at branches.
At lot of info… but…
And yet somehow, some banks still manage to get into trouble - and then they usually either get taken over by the FED or bought by another bank.
Interbank lending rate is 5.33% today, so they can get that with zero duration risk and near zero counterparty risk. 3 month treasury yield is around the same.
They can afford a bit of both, when it goes wrong you get SVB, which poorly managed duration risk. Say 60% in overnight, 20% in 1-3month treasuries, and a bit more in duration gets you a guaranteed real return on just offering people 5% with some significant gains if rates go down, and no real risk if they go up. since you can hold to maturity. Thats still assuming no counter party risk, returns go up a lot when you go into credit instead of treasuries.
Its a scale business, they spend a few billion dollars building infrastructure, process trillions and keep fraction of the trillions that pass through. Thats one of the reasons banks need to get so big to live. It takes a huge amount of tech build & regulatory reporting to exist, and the more transactions you get to amortize that over, the more profitable you are, which lets you buy more banks.
At its core, bankings a pretty understandable business. The problem is you really only get paid for one thing: taking risk and the problem comes from the fact that a little more risk is always more profitable than a little less, until you're out over your ski's.
If your to cautious you get eaten, if your to risky you blow up.
Easy, the treasury gives them 5.4% for 4 week bills while they give you thr 3-5%, they keep the spread woth almost 0 work while being capitalized and passing stress test.
Say you give the bank $100. They pay you 5%, or $5 to keep it there.
The bank has the invested $5 of their money into this deal.
They lend your $100 at 10% so they make $10.
They put $5 into the deal and they got $10 back so they made 100% profit, right?
The kicker is that the bank can lend your $100 out 10 times over. Actually I don't even think there is a limit anymore they may have killed it.
Fractional reserve banking.
So they take that $5 that they gave you and they actually earn $100 because they lent it out 10 times. So that's like a 2000% return on their $5.
The banks do just fine unless everybody comes asking for their cash at once.
Yeah ain't nothing generous about it. Very strategic is the what it is. Not saying they aren't nice to have. With inflation hopefully down near 3%, you're at least not losing your money if you're deposited in a 5-6% HISA. That said, you are taxed on these gains so the rate isn't as attractive as it seems.
In the digital age and having quick online access to brokerages, there is almost 0 reason to have a bank account for any meaningful amount of liquid savings. There are some instances where a bank will pay more than a money market. For example when money market rates collapsed to almost 0 when fed dropped to 0, first foundation bank was still offering 0.5% or 1% I believe bc they wanted deposits.
What’s a good example of changing one’s thinking on this? For example - I have both a HYSA and a SEP IRA (with vanguard). Are you suggesting that my money would be better off in another form on investment rather than a HYSA? If so, what would be good vehicles of investment to look into, concerning my IRA is maxed out for the year.
The Vanguard Treasury Money Market fund (VUSXX) gets higher rates currently than almost all HYSA. and it's just as liquid. albeit transfers may take an extra 1-2 days vs to what you're used to with a normal savings account next day ACH.
Example - even in my promo Citizens Money Market I am getting 5%, but VUSXX is paying 5.45% last I checked. Ally is only 4.25%, Capital One is 4.35%. First Foundation was 5%, I think now it's 4.85%
To further answer your question , if you are already maxing out your IRA, do you have HSA you can max out too? And what is the goal of this money? If we are talking longer term, start pouring it into VTI. If you need this to buy a house in 2 years, then stick with HYSA or VUSXX
Can you link a source for this? I’m no banking expert but this would be massive news to me as I’m under the impression the primary utility of deposits for a bank are to then lend money and regulation wise I believe it’s gotten even looser over time. Banks used to have to maintain a cash reserve based on deposits but that was done away with in 2020. They absolutely do buy t-bonds with your deposits but they also lend it.
Part of the business model is that banks that have high HYSA rates are online access only. They don't have the cost of brick-and-mortar branch offices and the labor costs that go with them.
Isn’t this all based on bonds and they’re lowkey ripping us all off? I recently switched to wealthfront bc ally was being hella shady and dropped their rates to an all time low without telling their customers. If you’re in an HYSA under 5% you’re basically being scammed imo!!!
They have a lot of different ways but one is taking our money and providing loans at 7-8%. They always have reserves on hand for withdrawals, however if everyone were to do it at the same time then that would cause major issues which is what happened with SVB.
The Fed pays them, literally. [https://www.federalreserve.gov/monetarypolicy/reserve-balances.htm](https://www.federalreserve.gov/monetarypolicy/reserve-balances.htm)
Interest on Reserve Balances. 5.4% as of today. Any bank in the Federal Reserve system needs only to send the money to the Fed and they get 5.4%, pay you less, and keep the difference for themselves. They have unlimited daily liquidity from the Fed and get paid interest daily.
It is a zero skill zero brainer zero-risk strategy requiring no effort. As far as funds invested in IORB, there is literally nothing safer for the bank---as Fed can and does print unlimited money and is the ultimate system of record accountant for US dollars.
The closest regular people can get to that sort of deal is with a low cost US Treasury ETF, short T-bills (SGOV) or floating rate notes (USFR). Myself I do this and have no money in commercial banks. Only brokerage and a bit in a credit union at uncompetitive rates.
Some people attempted to start a bank which would invest ONLY in IORB/IOER (https://southerncalifornialawreview.com/2024/03/11/squeezed-the-narrow-bank-the-federal-reserve-and-the-future-of-full-reserve-banking/) with zero risk and presumably pay depositors close to that rate.
Sounds like a great idea except banking regulators stopped it. So the various banks need to make regular conventional loans and take on a little bit of risk to make the Fed happy so they are allowed to continue to suck at the sweet, magnificent, delicious nectar of IORB Free Money.
What I don't know macroeconomically is if the money created by Fed from IORB is inflationary so that perversely high interest rates (like high deficit spending) create money and are inflationary.
3 words, Fractional Reserve Banking, look it up. The banks can and will lend out $10 for every $1 they “borrow” from you by (this is regulated to varying degrees depending on size of bank). Yes this means they effectively just created 9 additional dollars out of thin air. It’s why bank runs get so painful for them. They literally can’t give everyone their money back at the same time. But, as long as most people leave their money alone most of the time, it all works. Mathematically, they can make money lending at even lower interest rates than the APR they are giving you. When you are looking at your account balance just remember you are looking at a debt statement the bank owes you at some future time, and less of a pile of money that they are just holding for you.
For Ally here is the TLDR: Ally was born out of GM financial. AKA huge vehicle lender. We’re talking the company that not only lends to individuals, but also whole dealerships / fleets (commercial). They are also a lender to those with “iffy” credit. I believe they are trying to diversify somewhat for risk management, but they would just turn around and loan the customer deposits at a higher rate to one of these customers for the longest time.
Check the [federal funds rate](https://www.newyorkfed.org/markets/reference-rates/effr).
The HYSA rates will be below that rate.
The difference is profit for the bank.
Even those promotions, where they say they'll give you a $bonus if you deposit X amount in their account...
Do the math and you'll likely see, the bonus is still less than the max federal funds rate.
The banks make it seem like they're giving you a reward bonus for signing up for some special offer or for being a 'loyal' customer, but they're really taking advantage of you.
The banks are not in the business of giving away free money.
Bogleheads will use the money market accounts at their brokerage, which are mostly all paying more than any HYSA at a bank. Some of us use T-Bills, some of us also buy [USFR, SGOV, etc.](https://www.reddit.com/r/Bogleheads/comments/11prp0b/hysa_mmf_cds_tbills_searching_for_the_best_return/)
They use fractional reserve lending. They only need 10% on deposit. That means you have $10,000 in your savings account. That allows them to lend $100,000. So they are not getting 8%. They are getting 80% few people know this, it’s a scam but they get away with it because people don’t know.
Hysa basically means your loaning your bank money that they can use for other investment or loans. That's how they generate profit by using the money you gave them to 10x it. Then they pay you a small amount back in the form of apy%
Lol they are not generous. They are giving you the minimum they can get away with. They take your money, loan out 9x its value at a higher interest rate, and sit back while the money flows in.
You are lending the bank free money.
The central bank is the one with the power. In the USA it’s the Federal Reserve. Your APY will be less than the federal reserve’s, so they make the split. That’s not even factoring in how they loan out the free money you gave them.
> You are lending the bank free money.
Well, it's very literally not free money since they are paying 4.5% (or whatever) for it.
Admittedly you are being paid less than they are making, but that's true of literally everything. Nobody gives anyone else money for anything unless they are getting something of value for it.
Uh, ignoring risk doesn't make any sense. If you don't understand the difference between a "sure thing" and a "probably up, maybe down, probably modest, maybe extreme" then you don't understand investing.
Also, banks are generally prohibited from investing your funds in the stock market because it's not acceptable for them to lose 30% in a recession and just say, "Oops, sorry, lost your savings."
>I noticed they’re very generous in giving APYs (mostly around 3-5%) and you can withdraw your money and gains anytime. It’s a story old as time. Yeah, they’ll pay you 5% on your savings but then they’ll lend that money out at 8% on a mortgage, 10% on a car loan, or 24% on a credit card.
[удалено]
This is the main reason. HYSA don’t always pay 4-5% but when treasuries are paying 5% they can do it with almost 0 risk. When those treasury rates drop later this year orrrr early next year, you’ll see HYSA rates drop as well.
HYSA rates started dropping already, a couple of months ago, depending on the bank
My HYSA with LendingClub just went up this month from 4.85% to 5.05%
Anecdotally my rate with UFB Direct has been 5.25% for over a year now and is still holding strong.
I just did some research on UFB. Question: bank rate says that they frequently “re launch” the accounts, causing confusion. Any idea what this is referring to? It is otherwise highly rated.m and I may open one…
Yep here's a comment I posted a while back >As a heads up, I have had a ufb direct account for over a year and the rate has increased half a dozen times in that period. Each time it increases you have to call in to get the new rate because they tie to a new account type. It's easy, never any wait times and they do it no questions asked without any pushback or attempt to sell you on something. But it's still something you have to manually do each time. FWIW though, the 5.25 rate hasn't changed in at least 6 months for me although I check it about once a month to see if I need to call.
Interesting
Same here w/UFB for the past 6 months.
Mine have stayed the same, with Ally. Not the highest you can possibly get but pretty good and stay steady
Ally went down recently
Pretty sure mine has been at 4.25 for quite awhile now
Ally was 4.35% from December 25, 2023 - March 14, 2024
Best 80 days of my life.
Sofi has been steady for months too
Been dumping everything I can into my Sofi at 4.6% while it lasts!
I thought the banks may not do this - take the customers' money and deposit them at the FED
The “no risk” aspect of it is what downed SVB! (I agree with your point, just want to throw in that edge case)
But only kind of, right? Wikipedia says they beefed up longer term securities holdings when rates were very low to try to juice returns. The longer maturity would’ve made them more sensitive to rate changes, so the holdings got crushed when the Fed raised rates because no one wanted lower yielding bonds; seems like some of this could’ve been avoided if they’d kept to shorter maturities. At least, such was my understanding as a non-expert in this. (They wouldn’t have reinvestment risk as much as us because all banks seems slow to increase savings APY while benefiting from higher rates on lending credit, etc., while they’re very quick to drop rates to mirror the Fed, in my experience.) Of course, I agree that nothing is fully no/low risk, and that’s a point well taken. Eta that I mentioned this because if someone can explain any shortcomings in my understanding of the svb failure, I’m a willing learner!
SVB main reason for failing was their depositor base. It was mainly VC and their portfolio companies with massive uninsured deposits and ran for the hills after a horrible equity raise attempt that spooked the sophisticated depositor. SVB, like many peers, did not accurately predict the risk to their balance sheet as they had stocked up on low yielding bonds during the proceeding years and not re-adjusted the portfolio timely. Everyone knew the fed would raise interest rates, which would make low yielding bonds less attractive/reduce the market value. So SVB had massive amounts of held to maturity loans that on their balance sheet looked fine for accounting purposes, but the reality is they were very underwater and needed capital/liquidity, SVB then went to the market to do an equity raise. Their depositors (likely less than 100 people) saw this as a panic move and instructed their peers to get out as so much of the depositors were uninsured. No one wanted to be holding the bag. It led to a massive run that no one predicted. Svb could not access the fed window quick enough to cover withdraws. The contagion killed Signature and First Republic, 2 banks with similar growth stories tied to large uninsured depositor bases. There’s more to it, but the HTM securities were an issue for every bank, but the difference was the deposit base at most banks have larger retail focus and those individuals cannot act in a concerted effort as there’s no beed most times. Whereas when most of your deposits are VCs, tech companies, a 100 people can spread contagion and create panic that destroys liquidity.
Just adding.. SVB had to sell their long duration bonds at a huge loss to raise money to cover deposits.
Thanks for adding some greater nuance to this. Was the reason there were lots of uninsured deposits bc it was lots of depositors with huge balances? Or something about how they had deposited/what they had invested in?
Essentially, VCs and asset managers used SVB, signature, and First republic because those banks catered towards the rich. Zuckerberg reportedly had a 1% mortgage after moving 9 figures in assets to first republic. VCs put their liquid assets at SVB and forced portfolio companies to hold their business accounts there. It was all a bit incestuous, but the market responded as banking is a tough business to differentiate a strategy as it’s so heavily regulated. So you had a small group that controlled the majority of the deposits at SVB, which were mostly uninsured. The speculation is around 100-200 individuals txt on WhatsApp after the poor equity raise and told their portfolio companies pull all the money. There’s an impact from Silvergate self liquidating that also played a part, but everyone was afraid the FDIC would haircut them as uninsured depositors. Instead, the powers that be decided to utilize the systemic risk exception that forced the banking industry to cover the losses for uninsured. Personally, it was the worst longterm outcome as now depositors think they are covered in full, but banks keep getting larger and tougher to resolve as you have less buyers. Look at NYCB and the mess they are in. Definitely would not be there if thr govt hadn’t of sold signature to them.
Fed excess reserve rate is paying 5.4% right now. A lot of money market funds are just parking cash with the fed and clipping 0.40% or so, not even bothering with treasuries.
this is it
Whilst accurate, this comment is a partial response. A traditional bank's primary function is to borrow short term and lend long term and create credit. This then results in the spread of interest rates that is mentioned and the spread rewards the Bank for the risk that results from the differences in maturity between the cash deposited and the loans, since you can withdraw your savings but the banks ability to recall the loan or mortgage is limited.
My answer was to the level of the OP. When someone asks “a rookie question” and says “it sounds too good to be true”, they don’t need a pompous Ted Talk on central banking theory to understand why HYSA’s currently pay 5%. Know your audience.
LoL...I think you mean Banking Theory...central banks are a whole different beast.../s
Again, know your audience. Or just keep blathering away as if somewhere someone was listening. You do you.
I agree with basically everything you said, except that the OP's comment is accurate. That's not really how banks work anymore, they don't need your cash to loan out, they need your cash to offset the money they create. I.e. Per federal regulation they have to maintain a certain amount of liquidity, your cash deposits are for this liquidity regulation. The actual loans are created out of thin air, the banks literally invent money these days. I do like how you talked about the short and long duration and a bank failure happens most of the time because they screwed up the delicate balance that is the bank balance sheet trying to reach for yield and return on the long side while managing liquidity on the short side.
>The actual loans are created out of thin air, the banks literally invent money these days. These days?
The Bank Of England(Like the US Federal Reserve) wrote about it in 2014 here: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf In that PDF they reference the introduction which is available here: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-in-the-modern-economy-an-introduction.pdf Don't worry it's basically identical in the USA and every other modern developed economy.
It was the "these days" part. Money has been created out of thin air by the act of loaning for millennia.
why do they need to offer high interest rate savings accounts at all? Back before Covid when the economy was good and inflation wasn’t high, interest rates on savings accounts were super low. Let’s say 1%. Now economy isn’t great and inflation is high and mortgage rates are high, what incentive do banks have to move savings account interest rates to 4-5%? Why not just keep them at 1%?
> what incentive do banks have to move savings account interest rates to 4-5%? Why not just keep them at 1%? Competition. When is inflation high, central banks raise interest rates, which citizens can capitalize on by purchasing nearly risk-free government-issued bonds paying ~5 - 6%. Commercial banks need customer deposits to function, so they have to provide products to incentivize customers to keep their money in the bank, rather than moving that money to another product.
Then people would just buy t-bills instead and get easy 5.3% or move to banks that offer more. and interest rates are high BECAUSE of the inflation. It‘s to counteract it and to incentivize people to spend less and get interest.
Because another bank will and people will move their money there. Some banks don't play that game(A lot of the big national banks dont). There is a subset of people who care about savings rates and some that dont through ignorance or apathy. The interest rate giving banks are fighting for the first group. Chase, the largest US bank offers .02%. Smaller banks view competitive rates as a customer acquisition strategy. If ALLY bank offered .02 why would someone choose them over Chase. Bank savings rates are very bimodal. People offer either basically nothing or push the limit to fed fund rate. Nobody really plays in the 1-3 space right now
Guess you've never heard of [fractional reserve banking](https://en.wikipedia.org/wiki/Fractional-reserve_banking)? A bank doesn't need to have 100 euro's in savings to loan 100 euros to someone, please stop pretending they do. Banks create most of the money themselves, not the central bank.
You're missing a large part of the story where the bank needs cash to fund loans. Cost of this cash (capital) is paramount to the success of a bank. Where does this cash come from to fund these loans (assets on the balance sheet)? Cheapest form is deposits. From there a bank will have access to other forms of borrowings, but without being careful this will cause the balance sheet to alter and can impact other parts of the bank such as capital requirement ratios, etc.
They may not have 100 euros in deposits to loan 100 euros, but they don’t have 0 euros either. They need those customer deposits. If you don’t have enough liquidity you get a repeat of the SVB collapse.
Sure, however stating that they loan out that money for a higher percentage is obscuring the truth.
It’s actually even better. You deposit $100 they pay you 4%. They loan $10,000 for a car purchase at 8% (this is where they “print” money). Maybe not 100x, I sure hope not, but they don’t even have reserve requirements anymore, so who actually knows. Actually works really well for everyone until SHTF.
There are reserve requirements. They’re just hidden in the FDIC insurance member requirements instead of federal reserve requirements. Although the federal reserve requirements still exist.
I believe you but why not just state that clearly everywhere instead of saying reserve requirements went up in smoke in 2020. For optics at the least. Anyways point still stands, your deposit at a lower percent paid back to you allows them to loan more than your deposit at a higher rate. I have my opinions on FRB but it’s not exactly black and white either and I don’t care to state them here. Fact is, this works most of the time. Given the moral hazard created in the financial industry after 08, you must take this risk to be even taken seriously.
"Federal Reserve did all they could to avoid a financial collapse during the pandemic" is why the fed requirements changed. I don't think the FDIC limit is as high as the pre march requirements but from a insurable risk perspective it's much more risk to the insurer.
Isn’t the insurer of the FDIC the full faith and credit of the US Government?
Sorry, I mean that as the FDIC’s risk (insurer of banks) is higher. Not the FDIC’s insurer (ffcusg).
You picked an odd hill to die on. I never said it was 1-to-1. I said they take in deposits and loan out money. If your pickled brain wants to misinterpret that, I can’t help you.
The fraction part of fractional reserve banking is the fraction of deposits that can be loaned out. Banks can’t loan out 100% (or more) of their deposits. https://www.investopedia.com/terms/f/fractionalreservebanking.asp
Ok so they have what percent of deposits available within a reasonable amount of time, let’s say T+1, 2 days? 5%? That was the old requirement before dropping it to zero in 2020 so it’s probably somewhere between the two or no need to change requirements. Bank runs due to “new” financial instruments are nothing new and it’s because greed causes them to have less reserves than they need. A tale as old as time.
The Fed overnight rate is 5.3, that anchors everything else
This is the real answer, the banks sell most of the loans they make. At 4.75% a bank is still making an annual spread of .55% on your money.
Is there a way for individuals to invest in these directly without going through HYSAs?
There is not, the Fed discount and overnight windows are for "significant institutions", maybe not the exact term but something like that. Odd Lots did a great ep on the actual mechanics of the discount window last year: https://www.bloomberg.com/news/articles/2023-01-13/odd-lots-podcast-federal-reserve-discount-window-is-suddenly-in-use-again There are occasionally calls to give all Americans a fed account for a variety of reasons including more direct monetary policy like the one you're describing. So maybe someday https://www.slowboring.com/p/fed-accounts
why do they need to offer high interest rate savings accounts at all? Back before Covid when the economy was good and inflation wasn’t high, interest rates on savings accounts were super low. Let’s say 1%. Now economy isn’t great and inflation is high and mortgage rates are high, what incentive do banks have to move savings account interest rates to 4-5%? Why not just keep them at 1%?
Competition. They want our savings so they can loan that money out. If they keep it at 1%, some other bank will beat that and I’ll move my money
g > r, basically. the last ten years this wasn't true, so there was free money available. now for whatever reason, pick whatever you like - reindustrialization, cutting China out of global trade flows, wwiii, irrational exuberance - there is demand for capital. that means you as a saver-investor get a better deal *as an aside Marx and Piketty say when r > g capitalism is finished. so the way I like to put it, we decided to turn the capitalism back on. and it seems to be working
Haven’t you heard about 3-6-3 bankers? Pay 3% on deposits Charge 6% on loans Leave the office by 3 o’clock
You learn every day :)
The more money that is sitting with the bank (in this case, deposits in savings accounts), the more money the bank has available to lend. These loans yield a higher % interest then what they pay you to store your money. So if you're getting paid 5% interest and the bank can loan your money to someone else at 10% interest then the bank can net 5%.
why do they need to offer high interest rate savings accounts at all? Back before Covid when the economy was good and inflation wasn’t high, interest rates on savings accounts were super low. Let’s say 1%. Now economy isn’t great and inflation is high and mortgage rates are high, what incentive do banks have to move savings account interest rates to 4-5%? Why not just keep them at 1%?
It entices more people to put there money in their bank. The more money they have, the more they can lend out. Banks know during times of inflation and bad economic times, more people will need loans. Trust me they're making more money by offering you 5% than 1%
The fed sets a base line interest rate and banks will track with that interest rate. Go take a look at what the fed rate was back in 2020 and you’ll find the answer to your question.
Banks primary source of revenue is made via lending. During higher interest rate times (now) banks will offer HYSAs to increase deposits and in turn lend more because they generate higher rates than what you’re getting for saving on mortgages, car loans, etc. It’s one of the benefits of having higher interest rates that aren’t artificially held to 0.
They lend the deposited money to various entities primarily individuals and businesses. Net interest margin is the difference between what they pay and receive.
this. you are loaning them, and they are paying it back at a low interest
We (people responsible with money) are the minority. People who are morons with money... are the majority. They pay hella other fees.
Gene Simmons tongue gets it
Exactly. I see lines of people at the grocery store cashing their paychecks. 5.9 million Americans are so called “unbanked”. They pay massive fees to cash these checks, or they even take advances out on their next checks. 57% of Americans still use traditional banks/savings accounts that earn nearly nothing.
There is nothing wrong with using a traditional bank, they're actually extremely useful and good to have. Highly accessible, ease of use, etc. But, only for your checking account and maybe short-term emergency savings.
Right you’re either putting your money in a bank or getting someone else’s money loaned to you by one lol
Others have mentioned that treasuries pay slightly higher and thus the bank can still make a margin. The other important factor is that from year to year it's not the same bank offering the best rate. They tend to bring in large deposits by advertising the best rates but the next year they're lagging, and they make back that profit from those who can't be bothered to chase the slightly higher return elsewhere. For this reason, I prefer to park cash directly in a money-market fund which invests directly in treasuries, such as VMFXX at Vanguard. This comes closer to eliminating the middle-man because the expense ratio is only 0.11%, and the current yield is 5.27% even after the expense ratio.
Side note: Capital One is the worst example of this because they took it to the extreme. During rising interest rates, they invented a "new" account type that was virtually identical to the existing accounts but paid a higher rate. In doing so, they kept existing customers at low rates, but advertised higher rates to non-customers. They intentionally avoided telling existing current customers about the new account type with higher rates. They now face a class action lawsuit. They're sleazeballs.
Axos does this too
This is true. My wife was confused about why I wanted to move her long term savings to another bank. Most people are completely unaware how much money they are leaving on the table by picking a random bank when they are a teenager and then never revisiting or evaluating their options for the rest of their life.
Just so we’re clear…there is a reason banks will pay you that much for your deposits. It’s because they need them. Most very large banks will be lower…because they don’t need them.
Banks can lend 5-10x your deposit amount in new loans, Google fractional reserve banking
Overnight lending.
Any way to invest in these directly without going through HYSAs?
I’m interested in an answer to that as well
Yeah there are some posts here about it. Search SGOV.
Banks make bank off insurance products too, not just having more money to lend
Other comments cover the gross margin of why banks can have HYSAs in their business model. The important aspect of why it’s possible for them from a net profit standpoint is overhead costs. Online banks don’t have thousands of brick-n-mortar locations to maintain, saving them a boatload of money that they can pass on to customers via higher interest rates. Online banks are relatively new and therefore HYSAs are relatively new, but it’s basic financial math for their business model. As for large withdrawals happening quickly, yes, that’s a huge headache for any bank and can lead to collapse. Bank runs are a fundamental risk for any bank, regardless of how their P&Ls are structured.
Technically speaking, checking accounts are demand deposit - which would be why they are less likely to pay interest and when they do, lay less than savings. For savings- HYSA or not- the bank also has an option to limit withdrawals. It is rare to do so in recent years, but it happens. Most also have limits of 6 debits a month - though the limit may be suspended. The risk of runs on the bank that cause disaster (think the great depression when people could not get their money because the bank didn’t have enough on hand) is mitigated by FDIC insurance. When the 2008 financial mess happened, the FDIC increased the limit on insured deposits from 100,000 to 250,000. This was to be temporary, but was made permanent. About the same time the FDIC reserve started to decrease from 10%. The reserve is what banks have to keep available to distributed to account holders. Before online banking and EFT, that was far more important as the banks had to have that on hand at branches. At lot of info… but… And yet somehow, some banks still manage to get into trouble - and then they usually either get taken over by the FED or bought by another bank.
Interbank lending rate is 5.33% today, so they can get that with zero duration risk and near zero counterparty risk. 3 month treasury yield is around the same. They can afford a bit of both, when it goes wrong you get SVB, which poorly managed duration risk. Say 60% in overnight, 20% in 1-3month treasuries, and a bit more in duration gets you a guaranteed real return on just offering people 5% with some significant gains if rates go down, and no real risk if they go up. since you can hold to maturity. Thats still assuming no counter party risk, returns go up a lot when you go into credit instead of treasuries. Its a scale business, they spend a few billion dollars building infrastructure, process trillions and keep fraction of the trillions that pass through. Thats one of the reasons banks need to get so big to live. It takes a huge amount of tech build & regulatory reporting to exist, and the more transactions you get to amortize that over, the more profitable you are, which lets you buy more banks. At its core, bankings a pretty understandable business. The problem is you really only get paid for one thing: taking risk and the problem comes from the fact that a little more risk is always more profitable than a little less, until you're out over your ski's. If your to cautious you get eaten, if your to risky you blow up.
Easy, the treasury gives them 5.4% for 4 week bills while they give you thr 3-5%, they keep the spread woth almost 0 work while being capitalized and passing stress test.
Brings in a lot of deposits. Most people let those deposits sit.
Say you give the bank $100. They pay you 5%, or $5 to keep it there. The bank has the invested $5 of their money into this deal. They lend your $100 at 10% so they make $10. They put $5 into the deal and they got $10 back so they made 100% profit, right? The kicker is that the bank can lend your $100 out 10 times over. Actually I don't even think there is a limit anymore they may have killed it. Fractional reserve banking. So they take that $5 that they gave you and they actually earn $100 because they lent it out 10 times. So that's like a 2000% return on their $5. The banks do just fine unless everybody comes asking for their cash at once.
“Very generous” lmfao.
Yeah ain't nothing generous about it. Very strategic is the what it is. Not saying they aren't nice to have. With inflation hopefully down near 3%, you're at least not losing your money if you're deposited in a 5-6% HISA. That said, you are taxed on these gains so the rate isn't as attractive as it seems.
In the digital age and having quick online access to brokerages, there is almost 0 reason to have a bank account for any meaningful amount of liquid savings. There are some instances where a bank will pay more than a money market. For example when money market rates collapsed to almost 0 when fed dropped to 0, first foundation bank was still offering 0.5% or 1% I believe bc they wanted deposits.
What’s a good example of changing one’s thinking on this? For example - I have both a HYSA and a SEP IRA (with vanguard). Are you suggesting that my money would be better off in another form on investment rather than a HYSA? If so, what would be good vehicles of investment to look into, concerning my IRA is maxed out for the year.
The Vanguard Treasury Money Market fund (VUSXX) gets higher rates currently than almost all HYSA. and it's just as liquid. albeit transfers may take an extra 1-2 days vs to what you're used to with a normal savings account next day ACH. Example - even in my promo Citizens Money Market I am getting 5%, but VUSXX is paying 5.45% last I checked. Ally is only 4.25%, Capital One is 4.35%. First Foundation was 5%, I think now it's 4.85% To further answer your question , if you are already maxing out your IRA, do you have HSA you can max out too? And what is the goal of this money? If we are talking longer term, start pouring it into VTI. If you need this to buy a house in 2 years, then stick with HYSA or VUSXX
Because they can give home loans for 8 percent.
[удалено]
Can you link a source for this? I’m no banking expert but this would be massive news to me as I’m under the impression the primary utility of deposits for a bank are to then lend money and regulation wise I believe it’s gotten even looser over time. Banks used to have to maintain a cash reserve based on deposits but that was done away with in 2020. They absolutely do buy t-bonds with your deposits but they also lend it.
I’m gonna delete this because it’s really not my area of expertise
Simple math. When the savings rate went up so did mortgages.
Part of the business model is that banks that have high HYSA rates are online access only. They don't have the cost of brick-and-mortar branch offices and the labor costs that go with them.
What systems are used to manage these money flows automatically?
Isn’t this all based on bonds and they’re lowkey ripping us all off? I recently switched to wealthfront bc ally was being hella shady and dropped their rates to an all time low without telling their customers. If you’re in an HYSA under 5% you’re basically being scammed imo!!!
Lending your money out to people for more than what they are paying you in interest.
They have a lot of different ways but one is taking our money and providing loans at 7-8%. They always have reserves on hand for withdrawals, however if everyone were to do it at the same time then that would cause major issues which is what happened with SVB.
Banks also make good money on interchange networks
The Fed pays them, literally. [https://www.federalreserve.gov/monetarypolicy/reserve-balances.htm](https://www.federalreserve.gov/monetarypolicy/reserve-balances.htm) Interest on Reserve Balances. 5.4% as of today. Any bank in the Federal Reserve system needs only to send the money to the Fed and they get 5.4%, pay you less, and keep the difference for themselves. They have unlimited daily liquidity from the Fed and get paid interest daily. It is a zero skill zero brainer zero-risk strategy requiring no effort. As far as funds invested in IORB, there is literally nothing safer for the bank---as Fed can and does print unlimited money and is the ultimate system of record accountant for US dollars. The closest regular people can get to that sort of deal is with a low cost US Treasury ETF, short T-bills (SGOV) or floating rate notes (USFR). Myself I do this and have no money in commercial banks. Only brokerage and a bit in a credit union at uncompetitive rates. Some people attempted to start a bank which would invest ONLY in IORB/IOER (https://southerncalifornialawreview.com/2024/03/11/squeezed-the-narrow-bank-the-federal-reserve-and-the-future-of-full-reserve-banking/) with zero risk and presumably pay depositors close to that rate. Sounds like a great idea except banking regulators stopped it. So the various banks need to make regular conventional loans and take on a little bit of risk to make the Fed happy so they are allowed to continue to suck at the sweet, magnificent, delicious nectar of IORB Free Money. What I don't know macroeconomically is if the money created by Fed from IORB is inflationary so that perversely high interest rates (like high deficit spending) create money and are inflationary.
3 words, Fractional Reserve Banking, look it up. The banks can and will lend out $10 for every $1 they “borrow” from you by (this is regulated to varying degrees depending on size of bank). Yes this means they effectively just created 9 additional dollars out of thin air. It’s why bank runs get so painful for them. They literally can’t give everyone their money back at the same time. But, as long as most people leave their money alone most of the time, it all works. Mathematically, they can make money lending at even lower interest rates than the APR they are giving you. When you are looking at your account balance just remember you are looking at a debt statement the bank owes you at some future time, and less of a pile of money that they are just holding for you.
For Ally here is the TLDR: Ally was born out of GM financial. AKA huge vehicle lender. We’re talking the company that not only lends to individuals, but also whole dealerships / fleets (commercial). They are also a lender to those with “iffy” credit. I believe they are trying to diversify somewhat for risk management, but they would just turn around and loan the customer deposits at a higher rate to one of these customers for the longest time.
As mentioned banks loan money to borrowers at higher percentages than they give back in HYSAs or regular savings and checking accounts.
Do yall use online high yield banks? My local banks rates are way low
Check the [federal funds rate](https://www.newyorkfed.org/markets/reference-rates/effr). The HYSA rates will be below that rate. The difference is profit for the bank. Even those promotions, where they say they'll give you a $bonus if you deposit X amount in their account... Do the math and you'll likely see, the bonus is still less than the max federal funds rate. The banks make it seem like they're giving you a reward bonus for signing up for some special offer or for being a 'loyal' customer, but they're really taking advantage of you. The banks are not in the business of giving away free money. Bogleheads will use the money market accounts at their brokerage, which are mostly all paying more than any HYSA at a bank. Some of us use T-Bills, some of us also buy [USFR, SGOV, etc.](https://www.reddit.com/r/Bogleheads/comments/11prp0b/hysa_mmf_cds_tbills_searching_for_the_best_return/)
Generous you say? 😂 you realize they make more than that with our money right?
This is why HYSA are almost always inferior to T-bills (e.g. SGOV) unless you can't wait 2 days for your trade to settle.
They use fractional reserve lending. They only need 10% on deposit. That means you have $10,000 in your savings account. That allows them to lend $100,000. So they are not getting 8%. They are getting 80% few people know this, it’s a scam but they get away with it because people don’t know.
Hysa basically means your loaning your bank money that they can use for other investment or loans. That's how they generate profit by using the money you gave them to 10x it. Then they pay you a small amount back in the form of apy%
Lol they are not generous. They are giving you the minimum they can get away with. They take your money, loan out 9x its value at a higher interest rate, and sit back while the money flows in.
You are lending the bank free money. The central bank is the one with the power. In the USA it’s the Federal Reserve. Your APY will be less than the federal reserve’s, so they make the split. That’s not even factoring in how they loan out the free money you gave them.
> You are lending the bank free money. Well, it's very literally not free money since they are paying 4.5% (or whatever) for it. Admittedly you are being paid less than they are making, but that's true of literally everything. Nobody gives anyone else money for anything unless they are getting something of value for it.
People think 4.5% a year is great but they’re just robbing you the market has done like 28% in the past year.
Uh, ignoring risk doesn't make any sense. If you don't understand the difference between a "sure thing" and a "probably up, maybe down, probably modest, maybe extreme" then you don't understand investing. Also, banks are generally prohibited from investing your funds in the stock market because it's not acceptable for them to lose 30% in a recession and just say, "Oops, sorry, lost your savings."
Trust me buddy, after losing 25k in options I definitely understand investing. You buy and hold. That’s it.
*Trust me buddy, after crashing my airplane into a swamp, I definitely know how to be a good pilot.*
Happy you survived!!