Trapped in conservative behavioral psychology

We are now getting bigger increases in term deposit rates, including from major banks, so an update to their level seems in order.

The recent shift in ANZ to the upside likely signals a broader shift in all banks.

As we have previously noted, bank term deposit rates have some catching up to do. But some practical financial market constraints come into play, two in particular: the cost of wholesale money and the level of new loan demand. Both will help limit the amount that banks will be willing to offer savers for their term deposits.

Another factor at play is the behavior of savers. Over a very long history, New Zealand savers have shown serious reluctance to place funds on deposit for longer than 12 months. The most popular terms are currently 6-9 months. Since banks have mostly transformed into mortgage banks, they need long-term funding, which savers do not offer.

The other handicap that savers give themselves is that they don’t shop around. The banks know it and rely on it. They even take it into account in their cash management. They measure the “replicating portfolio” – the part that regularly and consistently turns over – and they have found that this is by far the largest part of their retail funding. History shows they can be counted on. This is seen by them as a “long-term” secure base that is always there.

Thus, savers are collectively shooting themselves in the foot by being charged short-term rates when in fact they will be leaving their funds with their bank for the long term.

There is also a deeply rooted psychological aspect to saver behavior. They say to themselves “I may need these funds soon” to justify short periods of commitment to TD. But again, a bank looks at the whole model and most savers don’t actually touch those funds. Savers are naturally conservative and this psychology works against them because they value negative risk much higher than positive returns.

We saw in 2020 and 2021 where savers transferred 20% of their time deposit balances to savings or transaction accounts in a movement of “fear” triggered by the pandemic. This has clearly benefited banks by reducing the cost of their funds from retail sources. But a bank treasurer would also have looked at those term deposit balances and noted that 80% remained there.even in these circumstances, most on 90/180/270 day terms. It is a very juicy replicating wallet, even in the most difficult circumstances.

If savers aren’t reacting to TD’s higher long-term rates, why would banks offer higher rates for short-term balances?

We’ve been seeing bids over 4% for two plus years now. They are unlikely to attract much interest from savers, even if they transfer these transaction and savings balances to term deposits. We’ll even see long-term deals of “5%” or more soon. They’ll grab attention, but really only work as a marketing incentive to start a conversation with savers. There is no downside for the bank.

It’s not like “real” investors shun long-term fixed rate investors. ASB was the latest retail bank to tap the bond markets in the past week, aiming to raise $100 million for five years with the same security and risk offered to term deposit savers. These “professional” investors piled in, offering more than $750 million which ASB took. And they are paying them 5.524% per year. ASB offers its savers a term deposit of 4.00% for five years. Go figure.

Think about it for a moment. ASB pays its bond investors an additional $11.4 million per year than it would pay its investors in term deposits for the same duration. Or, it’s what term deposit investors are giving up by collectively avoiding the long end of the TD market, leaving it to languish as an uncompetitive zone for banks.

Obviously, no saver can do anything about it. But this is an obvious consequence of the overall psychology of the saver.

A simple way to determine how much more you can earn is to use our comprehensive deposit calculator. We have included it at the bottom of this article. This will not only give you an after-tax result, but you can also modify it for the additional benefits of term PIEs. You’re better off having that extra interest than the bank (and especially if you’re in the 39% tax bracket – PIEs are 28% fixed taxes).

The latest aggregate rate offers are listed in this table after recent increases.

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