This is the fourth post on a quarterly set of numbers from Bank of America. That post sent my in-box on fire. The disagreement was absolutely vehement. Even when I mention global warming I do not stir up passions like this.
If you want to follow the saga read the posts in reverse order. Start with this post, then this and then this. Finally get to this current post. However if you are willing to accept my assertion that bank margins are rising regardless of subsidies then just ignore all but the first post.
I fully agree that – if at the moment – the FDIC guarantee were removed then Bank of America would fail. That failure would happen regardless of whether Bank of America is actually capital adequate or not.
However if the guarantee were removed the few banks around that were considered solvent would be flooded with money from people who wanted to put it there.
They would get those deposits very cheaply. Really cheaply. Free in fact.
The lending situation would be truly diabolical though. The rate customers would pay would go up sharply.
Bank margins would be truly spectacular. The problem would be survival to take advantage of those margins.
There is only one reason at all you are paid interest on bank deposits. It is that they are guaranteed.
Go to Bankrate.com. Look up the highest rate you can find. It is usually Corus Bank – which as noted here – is truly diabolical.
If you want to attract deposits you have to compete with Corus Bank. Corus Bank has those deposits and has the ability to attract them purely because it is guaranteed.
Note this. The guarantee raises the number of serious competitors in the deposit market. It raises the cost of deposits and it hence lowers bank margins.
Yes I stand by the assertion that if the guarantee were removed bank margins would rise – and deposit costs would fall.
Access to funds at all would be the issue. Not their price. Offering to pay for funds would not help (see the Akerlof Paper on the Market for Lemons for a good theoretical explanation).
Now when is it that my readers - usually with good economics training - stopped believing that the main determinant of margins is competition - and that subsidies given widely do not increase the income of the receiving industry - but just get competed away?