We noticed a couple of stories involving money fund competitors yesterday -- institutional bank deposits and brokerage sweeps. So we decided to excerpt from these, and to examine how FDIC insured sweep rates have been rising year-to-date. The Wall Street Journal writes "Meet the Bank Customers Pushing for a Better Deposit Deal," which tells us, "No longer happy with small returns, businesses are asking for higher interest rates on their deposit accounts -- and banks are acquiescing." We quote from this article, review brokerage sweep rate movements, and cite a press release from Total Bank Solutions below.
The Journal piece explains, "Consumers are giving banks a pass when it comes to shopping for higher interest rates on deposit accounts. Businesses, on the other hand, are becoming more demanding. With short-term interest rates on the rise, corporate depositors are seeking bigger payouts for their deposits, and big banks have started capitulating. The reason: Small rate increases are often worth just pennies to many consumers, but they can translate into meaningful dollars on large corporate deposits of millions or even billions of dollars."
It continues, "The pressure from corporate depositors is pushing up banks' costs just as they are beginning to benefit from lending money in the U.S. at higher rates.... Across the largest U.S. banks, the average interest paid jumped by about a third in the second quarter to 0.34% from 0.26% a year ago, according to Autonomous Research -- the highest level in four years. Bankers said business depositors are behind the rise."
The article explains, "While demand for higher rates has been "effectively at zero" from individual consumers, banks are grappling with "hot money from corporates" that are more likely to decamp for higher rates elsewhere.... Companies' success in getting higher rates is based largely on the size of their cash hoard and the amount of other business they do with a bank. The higher the cash balances and fees a company pays, the more likely it is to get an increase, either from its current bank or from a new one."
It tells us, "The way we approach pricing these days is, we defend our turf," says Tayfun Tuzun, chief financial officer at Fifth Third Bancorp.... Mr. Tuzun said U.S. banks are also being pressured by competition from overseas banks that want to build their deposits. Some are willing to pay 1.25% or 1.3%, he said, while a typical corporate deposit rate for a large account in the U.S. currently is about 0.9% to 1%. By contrast, the average retail savings rate was 0.18% at large banks in the second quarter, according to analysts at Jefferies Group LLC."
The WSJ writes, "For years after the financial crisis, rates were stuck at historic lows and loan demand remained tepid, so banks didn't care as much about gathering deposits.... But gathering deposits is starting to become more costly as the Fed moves short-term rates higher. Deposit rates are tied to short-term rates, but banks generally keep deposit rates low for as long as possible. More corporate customers say that day is now passing. "A year ago, it was not worth the time it takes to make a phone call" and push for a higher rate, said Jeff Glenzer, vice president at the Association for Financial Professionals.... "The higher the rate becomes, the more attractive it is to worry about where the money sits.""
They add, "Banks have responded to the new push by trying to attract or retain deposits without raising rates, specifically by offering expanded discounts, or "earnings credits," on other fees instead. Most banks are already awash in more deposits than they need, causing some analysts to predict they'll be stingy on corporate deposit rates, especially with loan growth softening in recent months. Some deposits can also be costly to banks, in terms of capital reserved against them. "We'll use pricing to start relationships," said Darren King, CFO of M&T Bank Corp., based in Buffalo, N.Y. "But over time, relationships need to work for both us and the customer."
In related news, Crane Data has noticed that it's not just the institutional rates that are rising, even retail sweep rates that had been virtually zero for almost a decade are moving higher. Our weekly Brokerage Sweep Intelligence, which tracks FDIC-insured and money fund "sweep" rates at the largest brokerages, shows that sweep rates continue to move higher in July. For balances of $100,000, our Crane Brokerage Sweep Index has risen from 0.01% at the start of the year to 0.06% in the latest week.
Among the latest moves higher: Ameriprise Financial Services, which paid 0.01% on an $100,000 balance in its Ameriprise Insured Money Market Account (AIMMA), now pays 0.05%. Fidelity which also was nailed to 0.01% in its Cash Management Account, now pays 0.14%. Merrill Lynch has moved sweep rates up to 0.14% on its Bank Deposit Program/RASP. Raymond James, which paid 0.04% on an $100,000 balance in its Client Interest Program, now pays 0.05%, and RW Baird now pays 0.08%.
Schwab, which paid 0.01% on an $100,000 balance in its Bank Sweep Feature, now pays 0.05%, as do UBS and Wells Fargo. Morgan Stanley, which paid 0.01% on an $100,000 balance in its Bank Deposit Program, now pays 0.02%, while `TD Ameritrade and E*Trade remain at 0.01%, where they were at the start of the year. Meanwhile, Crane Data's Money Fund Average has risen from 0.26% on Dec. 31, 2016, to 0.68% as of July 25, 2017.
Finally, a press release entitled, "Infovisa and Total Bank Solutions (TBS) Collaborate to Provide Extended FDIC Insurance for Cash Sweeps." It explains, "Infovisa and Total Bank Solutions (TBS) announced that they have agreed to offer the TBS Insured Deposit Program as a cash sweep option to the Infovisa client base. The Insured Deposit Program provides trust clients with the benefit of extended FDIC insurance, daily liquidity and the opportunity for improved returns. By accepting deposits, banks that participate in the program gain access to a diversified source of stable funding."
Michael Dinges, President and Chief Executive Officer at Infovisa, says, "The TBS Insured Deposit Program is an excellent cash management solution for our clients.... We have partnered with TBS because its platform offers competitive returns, robust integration, and is compliant with banking regulations. We are looking forward to a successful relationship." The release says, "Infovisa and TBS are currently jointly working on integration for the partnership, and plan to bring their first mutual client live in August 2017."
Kevin Bannerton, Partner at TBS, comments, "We are very excited to be able to offer clients on the MAUI platform a compelling cash sweep alternative for investors.... We believe the combination of our proprietary sweep technology, risk analytics platform and strong program bank network represents an immediate and trusted solution to money market fund reform for Infovisa's clients. Working with Infovisa, our goal is to provide their clients with a fully integrated and seamless insured deposit sweep option."
