Why are interest rates so low on savings accounts?

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Currently, banks don’t have to worry about competing for your money. Since the onset of COVID-19, the personal savings rate hit an all-time high of 33.8% in April 2020. This is the highest rate in the measure’s 62-year history. From the end of the Great Recession in June 2009 to February 2020, the personal savings rate averaged 7.25%. Since the start of the pandemic, however, it has averaged 17.9%.

According to the Federal Reserve, there are several reasons for this increase in the average savings rate:

  • Households practicing precautionary savings during an economic downturn
  • An inability to spend money due to business closures and social distancing guidelines
  • Stimulus checks (or relief payments) distributed to vast majority of US households

As Americans invest money in savings, banks have little incentive to increase the savings rate. Before the pandemic, commercial bank liquidity totaled $1.8 trillion. Liquidity increased to over $4.1 trillion in December 2021, more than double the February 2020 total. Liquidity has fallen slightly to around $3.4 trillion since the height of the pandemic, but is still close to historic highs.

While banks are sitting on tons of cash due to the pandemic, there has been a big slowdown in lending. The loan-to-deposit ratio of US banks has fallen drastically since the start of the pandemic and reached 58% in the second quarter of 2021, the lowest level according to the S&P Global Market Intelligence database, which dates back to 2003. This means that banks are sitting on more deposits than they have ever had.

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