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The pros and cons of our current interest rate environment.

The current banking and interest rate landscape is exceptionally volatile. Whether this is favorable or unfavorable news depends on your specific circumstances.


For individuals not considering significant expenses like a new home, vehicle, or investment property, increasing interest rates may not be a worry. In fact, you might be eager to capitalize on the appealing deposit rates being offered by banks.

Yet, if you're in the market for a new loan, elevated interest rates might be causing hesitation or making it difficult to participate in the market at all. In either scenario, it's crucial to grasp the connection between banking deposits and their capacity to provide loans.


Banks utilize a concept known as the "deposit multiple" to assess their lending capacity at any given moment. While the formula is intricate, the basic idea is that banks can only lend a specific portion of their deposits. This percentage may vary among different lenders, but a bank is considered fully committed when its loan assets amount to 94% of the deposits it holds.


Based on my research, many conservative banks set even lower self-imposed limits, although generally, most banks tend to operate within the range of 80 to 90 percent.


This holds significance because, as observed in the market, banks are presenting highly appealing rates for products like Certificates of Deposits (CDs), Money Market accounts, and various savings instruments. The pandemic prompted Americans to save a substantial $2.6 trillion, influenced by factors such as government expenditure, stimulus packages, increased incomes, and limited spending options during shutdowns.


With banks having ample deposits, they could provide loans at exceedingly low interest rates, almost as if they were giving money away. However, this situation has become a contributing element to the current hyperinflation we're witnessing, but that's a topic for a future blog post.


Banks were aggressively lending money at low rates, resulting in record-breaking profits from origination and other lending fees. However, as deposits have been depleted, banks are now facing restricted choices in continuing to extend loans while adhering to the deposit multiplier rule.


There's a cap on the funds Americans maintain in banks. In 2021, the average American had around $73,000 in savings, excluding retirement assets. Today, that figure is estimated to be around $65,000, signifying a notable decrease in available cash. To entice depositors, banks are now rolling out special offers on interest rates, some even reaching 5 percent or higher, marking the highest rates observed in the past 15 years.

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