Personal finance
GE Capital Purchasing MetLife Bank

Washington DC Might Divest from Bank of America, Wells Fargo

Miles By Discover Offers Relief to Noncommittal Travelers

Collection Agencies Resurrecting Old Debts Through Credit Card Offers

Treasury Doubles Purchase Limits on Electronic Savings Bonds

Cordray’s First Move as CFPB Head: Regulate Nonbanks

Weekly Wrap: Bank of America’s Worst Week Ever?

Dear U.S. Banks, Your Business Model Stinks

Shadow Banking Due for Some Time in the Spotlight

Weekly Wrap: Banking Slowly Dissolves?

Under the Roofs of Coffee Shops You’ll Find Your Online Bank

Brokerage Checking Still a Competitive Choice

Beware the Mirthful FOMC Meeting

Did ING Direct Customers Overreact to the Capital One Purchase?

No Balance Transfer Fee Offers Reappear But Hard to Exploit

Russell Simmons’ RushCard Lowers Fees, Is Still Bad

The Reason Why Freddie Mac Doesn’t Want to You to Refinance

New Bank Perks Cater to Tech-Savvy Customers

St. Louis Fed President: Raise Interest Rates

Whitney Warns: Banks to Banish Middle Class

Dime Savings Cites Regulations in Switch to State Charter

FDIC to Banks: Start Lending Again!

Weekly Wrap: Grey Days and a Sideshow

Weekly Wrap: Banking’s Spring Is Still Far, Far Away

American Express and Gen Y: BFF?

Low Interest Rates: A Ticking Time Bomb?
It’s hard to know where to park your savings these days with the market so volatile and interest rates so low. Put it in the markets and you might lose it all; put it in a savings account and you know you’ll lose it to an inflation rate that’s higher than any available APY. Buy a house? Yeah right. Naturally, this leads to a little bellyaching by consumers about the Fed’s zero interest rate policy (ZIRP) for the fact that it’s hurting America’s savers while doing little to help the economy as a whole. This is true, but it’s worth considering the downside to raising interest rates just to give your 36-month CD a better rate: it could be disastrous to the economy.

On Naked Capitalism, Yves Smith recently wrote a post explaining how ZIRP is a “hidden bank time bomb,” because of the unanticipated effects it has on where banks put their money in a low rate environment. Because ZIRP has failed to make banks actually refinance Americans’ mortgages, like it was supposed to, it has forced banks to figure out what the hell to do with all their liquid capital (much like you). So in an effort to increase their thin yields, banks have poured money into low-yielding low-risk bonds. Everyone has. Herein lies the risk of ZIRP.

Because banks have been dumping money into these bonds, they face serious downside risk in the future should the Fed raise rates, and there’s no way to hedge against it. A bond’s interest payment — called the coupon — is pegged to market interest rates at the time bond is issued and remains there until the principal is paid back and the debt is cleared. So, with banks putting their capital into long-term low-yield bonds, they’ll either be stuck with anemic cash payments long into the future while they wait for the principal payment, or stuck having to sell bonds with seriously diminished value, because the market interest rates will have been raised.

This “time bomb” Smith argues, will be set off by increasing the federal funds rate:

Now banks may be able to cover some of this us for a while. They may be able to put these low-yielding assets in a hold to maturity book…which will spare them taking mark to market losses. But they’ll still lose money on an ongoing basis if they have assets that yield 3% that they are funding at 5%.

So whenever the Fed does choose to raise interest rates — they’re saying ZIRP will continue until 2014 — there could be a bit of a blowup in the banking sector, which, as we know, tends to lead to recessions. This sequence of events has happened three times in the last three decades in the United States, argues Smith. There’s no good reason to suspect it won’t happen again. Therefore, asking for higher interest rates from your savings account is rather selfish. You aren’t, after all, entitled to low-risk investment vehicles just because you really badly want one. Banks don’t have one, and this is precisely the problem.

Äëÿ ïå÷àòè

Weekly Wrap: Astrology is Bunk

Refinancing Your Mortgage Lines the Pockets of the Biggest Banks

Experian Unveils New Credit Score for the Underbanked

New Upromise Credit Card Gives 10% Cash Back at Major Online Retailers

The Best Experiences Your Credit Card Can Buy This Summer

Citi Offers New Way to Spend Rewards

Fed Study: CD Rates Are Less Attractive

Wells Fargo Raised Checking-Account Fee, Slashed Bill-Pay Fee

Weekly Wrap: Get Bullied, Get Rich

Taibbi: No Difference Between Banks and the Mafia

Why You Should Probably Raise Your Credit Limit, Especially When You Don’t Want the Money

Accounts Push Relationship Banking

Weekly Wrap: LIBOR Aside, You’re Still in Control

Fed Report Shows Mobile Banking Empowers the Underbanked

Top Gas Credit Cards to ‘Refill’ Your Wallet

Prepaid Cards for Payroll Purposes: Fair to Workers?

Weekly Wrap: Mobile Banking’s Onward March

Banks Close Revenue Gap from Overdraft Fee Losses

Banks Lack Social Media Efforts… Oh Really?

SpringCoin: Out to Automate Credit Counseling

Could Student Loan Forgiveness Help the Economy?

Chase United MileagePlus Club Card Takes Flight

Caviar and Champagne With Your Checking Account?

Weekly Wrap: Cash Rules Everything Around You? Not For Long

SmarterBank’s Checking Account Helps Pay Off Student Loans

Chinese Furious Over Banking Fees

Banks Should Use Prepaid Cards to Hook ‘Em While They’re Young

Prepaid Travel Debit Card Provider Eyes U.S.

Sallie Mae Credit Card Helps Pay Back Student Loans

Post-CARD Act, Banks Shift to Prepaid on Campus

Weekly Wrap: Things Are Not as They Seem

Gen Y Eyes Retirement with Rose Tinted Glasses

Low Interest Rates: A Ticking Time Bomb?

Are Discover Partner Gift Cards Worth the Rewards Points?

Kony Solutions’ Branding Problem: Bank Software Firm Has Killer’s Name

Weekly Wrap: Fancy Gadgetry, No Money

Weekly Wrap: Millenials’ Big Day at the Races

UFB Direct Adds Money Market Account With 1.15% APY