What's up with banks closing down their high yield savings accounts and incentives lately?

Question

We had been keeping our cash savings in a Purepoint high yield savings account for the past few years, until we got this email from them a couple months ago:

"We’re reaching out to let you know about important changes to your account(s) and to the PurePoint® Financial organization. After thoughtful review of our business, we’ve made the decision to permanently close PurePoint Financial. This closure is scheduled to occur in late April 2023."

So we looked for another high yield savings account to move our money to, and settled on UFB Direct. Within about a month, we get this email:

"Thank you for being a UFB Direct preferred customer. We hope you’re enjoying your leading rate on your Preferred Savings account! As one of our valued customers, we wanted to let you know that starting 4/13/2023, UFB Direct will no longer offer Preferred Savings to new customers. This will not affect your account in any way. Sit back, relax, and continue to enjoy 5.02% APY* – no action needed on your part!"

I'm just curious as to whether these two banks are responding to an economic force that I am unaware of, or if it is just random. Any insight is appreciated.

Answer 1

Generally high yield savings accounts are used by banks to increase the deposit base. The banks are required to keep a certain ratio of loans outstanding to deposits in the bank, and paying high interest on deposit accounts helps banks to quickly bring in more deposits.

However it comes with a risk that the depositors will leave as quickly as they came once the banks start to lowering the savings interests. The banks assume that certain percentage of depositors will stay for various reasons when the interest rates go down.

In your case, you seem to be chasing the highest deposit interest possible, and you've hit banks that reached their goals on new deposits. In the first case it looks like the whole operation is being wound down, in the second it appears that the bank is no longer interested in new deposits (they reached their target), but is interested in keeping the depositors they acquired (they're not yet dropping the interest for the existing accounts, only new ones).

Answer 2

Banks compete for deposits and smaller banks that aren't household names need to incentivize depositors to open an account there rather than one of the big national chains or putting their savings into money markets.

Banks move away from HY savings accounts if their funding needs decrease, or if cheaper or more stable sources of funding become available, e.g. the newly created BTFP

Answer 3

Just a note that there have not been reserve requirements in years, so any desire to meet a certain LDR is a self-imposed constraint by the DI's themselves rather than a legal requirement. See for example here: "Effective March 26, 2020, the Board reduced reserve requirement ratios on all net transaction accounts to zero percent, eliminating reserve requirements for all depository institutions. The annual indexation of the reserve requirement exemption amount and the low reserve tranche for 2023 is required by statute but will not affect depository institutions' reserve requirements, which will remain zero."

As to your question:

I'm just curious as to whether these two banks are responding to an economic force that I am unaware of, or if it is just random

It is impossible to say what economic forces you are or aren't aware of! But more to the point, the business model of banks is pretty simple-- borrow short to lend long. Maintaining a deposit base (which comes at a cost to banks) is only important insofar as it helps enable them to make loans at rates and terms which outweigh the costs of business (which again, includes maintaining said deposit base).

So, why might banks close down their incentives beyond just idiosyncratic risk? Ultimately and obviously because they believe the cost of providing these incentives outweighs the benefit it provides them. There are many reasons this may be the case, I will name two-- one for each side of the equation.

1. From a revenue perspective: There may be a forecasted short/medium-term slowdown in lending activities. See here, for example, to see the long-term trend.
2. From a cost perspective: Banks may see savings becoming increasingly inelastic for the marginal consumer. For example, you'd need to go back almost a decade and a half to find a personal savings rate lower than it is today. This means that people were saving more of their disposable income when rates were at 0-0.25% (from 2010 to 2015 and during parts of 2021) than they are now when rates are at 4.75%. See here for example.

Answer 4

This seems like it may be an example of the winner's curse (from the bank's perspective). By always pursuing the most extreme offer, you preferentially do business with banks who have made that extreme offer due to some mistake, and therefore are likely to want to fix that mistake once they realize it.