Hello and welcome. You are listening to Patrick Boyle on Finance, a podcast exploring ideas from quantitative finance, examining events occurring in markets right now and financial history to see what lessons can be taken away, including interviews with some of the most interesting people in the world of finance. To learn more about the podcast, visit onfinance.org.

The end of historically low interest rates was expected to be good news for banks. As in a higher

interest rate environment, banks tend to be more profitable.

This is because the difference between what they charge borrowers for loans and what they

pay depositors for funding widens.

Unfortunately, the recent crisis in both the United States and Europe show that real

life is often more complicated than simple theory.

When interest rates and inflation rise, savers feel the pinch of inflation and expect

their money to work harder.

That doesn't always happen at banks and this can lead customers to take their money elsewhere,

especially in this day and age when it's

so easy to move money electronically.

When customers move their money away, other funding sources are still available for banks,

but these other sources also become more expensive as these investors are also demanding

higher yields. In the United States, total

bank deposits have been falling since the Fed began raising interest rates last year, as savers

realised they could earn higher returns in short-term treasuries or money market funds. Money-market

funds typically hold very low risk assets

that are easy to buy and sell, including short-dated US government debt. The yields available

on money market funds are now the best they've been in years as they rise when interest

rates rise and interest rates have been lifted to 15-year highs

by the Federal Reserve in its quest to curb inflation. This trend of moving deposits out-of-bank

...