Banks’ core practice of keeping deposit rates low is a fundamental aspect of how banking works, not just a minor issue with unscrupulous bankers. According to experts, this practice allows banks to maintain their business model even as the Federal Reserve raises interest rates.
In 2023, US regional banks faced a mini-crisis due to rapid interest rate hikes by the Fed. Depositors withdrew their funds from these banks and invested them elsewhere, such as Treasury bills or money market funds, in search of higher returns. This sudden loss of deposits exposed the vulnerabilities of banks that relied on cheap and stable funding sources.
As the deposits disappeared, banks were forced to replace them with more expensive money, undermining their core business model. This phenomenon can occasionally lead to bank failures, emphasizing the importance of understanding how banking works and the need for depositors to monitor their interest rates closely.
Source: https://www.bloomberg.com/opinion/articles/2025-01-15/capital-one-high-yield-account-wasn-t