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Better Economy Could Shrink Bank Deposits

Better Economy Could Shrink Bank Deposits

One of the side effects of an improving economy could be a mini run on banks.  That's because rising interest rates could lead people to pull money out of low-yield savings accounts and other bank deposits.  The recession of 2008 prompted many to "park" their money in banks, but as the economy improves they may look to move that money elsewhere.  "When rates fell because of the (economic) crisis, and the oil boom happened in Texas, we saw a lot of banks taking in large amounts of deposits," says Kelly Goulart with the Independent Bankers Association of Texas.  He predicts rising rates will lead to more options for those with money in savings accounts.  "If they're chasing yields, then they're gonna be looking for other vehicles (for their money)," he says.

Many banks have already been warned by federal regulators and are preparing for the inevitable rise in interest rates and subsequent run on savings accounts.  Goulart says it will likely only impact big banks.  "The larger banks that received the majority of investable funds that have been chasing dollars will see an outflow of those (investments) into other vehicles that are paying higher interest rates, but community banks may not see that," he tells KTRH.  Many of the large banks are preparing by borrowing in bond markets or from Federal Home Loan Banks. 

Right now, short-term interest rates remain at record lows, even more than four years after the "official" end of the recession in June 2009.  But long-term rates have already started to climb, and analysts predict short-term rates will follow, although it's unclear when that will happen.  While rising interest rates could be negative for borrowers, they are a positive for investors and those with money in savings, according to Goulart.  "I think a rising rate environment is going to be good for consumers," he says.  "Especially those who are dependent on the extra money they earn off of certificates of deposits and other investments they have at banks."

 

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