Author Topic: Are big banks value traps ?  (Read 13033 times)

benhacker

  • Lifetime Member
  • Hero Member
  • *****
  • Posts: 899
Re: Are big banks value traps ?
« Reply #50 on: October 20, 2019, 10:26:09 AM »
Another poster has opined that branchless banks can gather deposits at even lower costs

I don't think you understand what I am saying.  I believe you have the causation backwards for the banks.  You seem to be assuming that banks must (1) gather deposits, before (2) creating loans. 

That is not how the current monetary system works.   The order is (1) banks create a loan, which (2) creates a deposit. Sure a few deposits switch from one bank to another but on the whole its not a big factor.  This is because banks are federally chartered by the US Treasury and the Federal Reserve.  They don't need to gather deposits - for the most part they create them.   Branch operations are not an input cost for deposits when you are talking banks.

The only thing that limits their deposit (and credit creation) is regulations and capital.  It isn't even reserves (never was).  There is no relation between credit creation/deposits and reserves.  Anyone who quotes you the old chestnut of the banks "gather $10 of deposits, loan out $9 and must keep $1 of reserves" from the textbooks is wrong and you should immediately stop listening to them.

Non-banks can't do that.  They actually have to find money since they can't create it like the big banks can.

Didn't mean to turn this into a macroeconomics and monetary theory thread.  But there's a lot of misunderstanding of how banks work.

wabuffo

+1
Ben Hacker
Beaverton, Oregon - USA


reader

  • Newbie
  • *
  • Posts: 31
Re: Are big banks value traps ?
« Reply #51 on: October 20, 2019, 10:32:37 AM »

Aren't there two different activities going on here? 

I think Activity 1 is a commodity.  But specifically related to Activity 2:

1) Where does a non-bank (e.g. PennyMac) get the money to originate loans?  - the non-bank needs to find it.  In their case a warehouse line from JPM, BAC, WFC, etc.
2) Where does a bank (JPM, BAC, WFC) get the money to originate loans? - the bank just creates it.  In their case, loans create new deposits out of thin air, literally.

Who do you think has the real advantage for Activity 2?

wabuffo

If Activity 1 is a commodity, then the only potential advantage is lowest cost, with the costs being the SG&A associated with identifying borrowers and underwriting their loans, the capital cost of temporarily warehousing loans prior to selling them on and any transaction costs in doing so.  In my mind, a huge funding advantage for money center banks over other capital providers doesn't necessarily mean third parties can't have lower origination costs, which are largely SG&A, rather than capital costs.  If money-center banks have a clear lower cost for origination activity, why do third-party originators exist?  Are they really only flex capacity that picks up marginal business during good times and collapses during bad times when access to third-party capital dries up? 


AFAIK BAC doesn't want to originate mortgages to none BAC customers.
Money center banks paid tens of billions of dollars in fines and settlements. they simply have too deep of a pocket to make originating mortgages or student loans on a mass scale, lucrative. they know that there'll be a huge price to pay, and it's not priced into the origination margin because they're the designated fall guys.
So better not fight for market share and just provide a service to their customers.
In some cases keep the loans on BAC's books.
 

Cigarbutt

  • Hero Member
  • *****
  • Posts: 2039
Re: Are big banks value traps ?
« Reply #52 on: October 20, 2019, 10:56:58 AM »
^Since 1984 when Continental Illinois was Ďsavedí, the implicit support of government has increased steadily, in this closed loop environment, and, since the GFC, has moved into higher gear.

Since the GFC, the Ďdealí between the big banks and their symbiotic public partners has been to improve capital ratios and to endure more intense regulatory scrutiny in exchange for even more concentration of assets (and matching liabilities) among the dominating players at the core of the center. Size has compensated for lower NIMs. Contrary to what Mr. Powell suggested in 2013 (speech) and what Mr. Dimon mentioned in 2016, TBTF has not been resolved. This growing implicit support associated with the TBTF label has meant lower funding costs and cost of capital, irrespective of the scale effect brought by size alone. This closed loop has become a self-feeding loop.

This competitive advantage for big banks is now entrenched and would only grow in a deleveraging environment, implying support for decent results in the new normal environment and a temporary floor on perceived value in downturns as the big becomes bigger. Not a value trap if you are enduring and can enjoy a backstop and if you agree that breaking up big banks has become next to impossible . This is not what creative destruction was meant to be but it is what it is.

KJP

  • Hero Member
  • *****
  • Posts: 870
Re: Are big banks value traps ?
« Reply #53 on: October 20, 2019, 11:13:39 AM »

I don't think you understand what I am saying.  I believe you have the causation backwards for the banks. 

That is not how the current monetary system works.   The order is (1) banks create a loan, which (2) creates a deposit. Sure a few deposits switch from one bank to another but on the whole its not a big factor.  This is because banks are federally chartered by the US Treasury and the Federal Reserve.  They don't need to gather deposits - for the most part they create them.   Branch operations are not an input cost for deposits when you are talking banks.


Yes, I did not understand what you were saying. Thanks for explaining your point further. 

I understand that a bank making a loan (a bank asset) creates a deposit (a bank liability) somewhere in the banking system. I also understand that banks makes loans first and independently manages its capital requirements later.

What I don't follow is why making a loan necessarily creates a deposit on the lending bank's balance sheet.  For example, if a bank loans me money to buy a house, it will have that loan on its balance sheet as an asset.  But the deposit will be on the balance sheet of the seller's bank, wouldn't it?  Or am I missing something.



« Last Edit: October 20, 2019, 11:41:40 AM by KJP »

cameronfen

  • Hero Member
  • *****
  • Posts: 670
Re: Are big banks value traps ?
« Reply #54 on: October 20, 2019, 12:31:27 PM »
Another poster has opined that branchless banks can gather deposits at even lower costs

I don't think you understand what I am saying.  I believe you have the causation backwards for the banks.  You seem to be assuming that banks must (1) gather deposits, before (2) creating loans. 

That is not how the current monetary system works.   The order is (1) banks create a loan, which (2) creates a deposit. Sure a few deposits switch from one bank to another but on the whole its not a big factor.  This is because banks are federally chartered by the US Treasury and the Federal Reserve.  They don't need to gather deposits - for the most part they create them.   Branch operations are not an input cost for deposits when you are talking banks.

The only thing that limits their deposit (and credit creation) is regulations and capital.  It isn't even reserves (never was).  There is no relation between credit creation/deposits and reserves.  Anyone who quotes you the old chestnut of the banks "gather $10 of deposits, loan out $9 and must keep $1 of reserves" from the textbooks is wrong and you should immediately stop listening to them.

Non-banks can't do that.  They actually have to find money since they can't create it like the big banks can.

Didn't mean to turn this into a macroeconomics and monetary theory thread.  But there's a lot of misunderstanding of how banks work.

wabuffo

Sure but how do deposits flow bank to a bank, through deposits gathered by the branch (or if you prefer the bank makes the loan through the branch). The point is even if you are saying branches are useless, which I don't think you are,  most of the big banks have large branch structures that they are paying to run.  If you are being more reasonable and argue that branches are the marketing tool for writing loans and taking deposits, this is where the bank structure runs into trouble.  Big banks have a cost disavantage to challeger banks (yes challengers are having trouble--we discussed this upthread--but they are here to stay, gaining significant share who knows), but they can't close all their branches at once because the type of customer they have are ones that use branches.  The only way they can cut costs is to slowly migrate people online while closing branches as they become less useful.  Thus challenger banks and big banks that did this early (ie BAC) will have this advantage for a long time. 

Edit: To claify even if its a closed loop, and deposits/loans are zero sum, banks have branches to take a bigger piece of the pie from other banks or whoever (local loan shark?) and use it as a marketing tool.
« Last Edit: October 20, 2019, 12:39:16 PM by cameronfen »

Spekulatius

  • Hero Member
  • *****
  • Posts: 3873
Re: Are big banks value traps ?
« Reply #55 on: October 20, 2019, 02:34:52 PM »
I donít think itís quite as simple. Look for example at mortgage origination.
Sure.  Mortgage origination is a large and complex market. 

Extending credit can be done by anyone - I can give you an IOU and you just extended credit to me.  Loan creation!  ;D  If my credit rating is superb, you can even sell that IOU piece of paper (chit) to someone else at 100-cents on the dollar.  Even better - Money creation!   ;D  You are now a bank!   8)  Only problem is that this chit is not 100% guaranteed by the US Treasury - so not a bank! :-[  Probably not going to get 100-cents on the dollar - so real banks win!

But take a look at your example of PennyMac.  Who funds their origination and loan purchases with wholesale financing?:
Quote
We maintain multiple master repurchase agreements and mortgage loan participation and sale agreements with money center banks to fund newly originated prime mortgage loans purchased from correspondent sellers. The total unpaid principal balance (ďUPBĒ) outstanding under the facilities in existence as of December 31, 2018 was $1.5 billion.
The banks may not want to take every credit risk out there - but they are happy to fund those who do for a price.

The big banks have huge funding advantages and while they may not play in every part of the financial services business, their central role in deposit gathering and payment clearing as well as their integration with the transmission of interest rates to the broader economy makes them pretty bullet-proof.  Does that make them great investments relative to every other stock, I'm agnostic about that.  But they are not "melting ice cubes".  I'm pretty sure about that.

wabuffo

The problem with abandoning mortgage origination (and servicing) is that banks are not customer facing any more and provide a commodity service to those that are. I am sure providing wholesale financing is profitable, but at that point, they lost part of their brand and data/knowledge about customers.
Brokerage (at zero commissions ) is a service banks provided to increase customer engagement and as a path to upsell wealth Management services etc. They were never good at it and if the Wells Fargo advisor GUI is an indicator for industry standards (thatís the only one I know), it was functional but bare bones. The zero commission trend for the brokerage become an issue with Robinhood and perhaps IBKR announcing lite with zero commissions. Now that you can have zero commission with all the main brokerages with much better service and GUIís, I think the banks will be having a hard time keeping assets and hence lose another way to acquire and cross sell to customers.

Itís not going to kill them but things like this are slowly chipping away at their franchise.
« Last Edit: October 21, 2019, 10:46:32 AM by Spekulatius »
Life is too short for cheap beer and wine.

Cigarbutt

  • Hero Member
  • *****
  • Posts: 2039
Re: Are big banks value traps ?
« Reply #56 on: October 21, 2019, 06:52:57 AM »
I don't think you understand what I am saying.  I believe you have the causation backwards for the banks. 

That is not how the current monetary system works.   The order is (1) banks create a loan, which (2) creates a deposit. Sure a few deposits switch from one bank to another but on the whole its not a big factor.  This is because banks are federally chartered by the US Treasury and the Federal Reserve.  They don't need to gather deposits - for the most part they create them.   Branch operations are not an input cost for deposits when you are talking banks.
Yes, I did not understand what you were saying. Thanks for explaining your point further. 

I understand that a bank making a loan (a bank asset) creates a deposit (a bank liability) somewhere in the banking system. I also understand that banks makes loans first and independently manages its capital requirements later.

What I don't follow is why making a loan necessarily creates a deposit on the lending bank's balance sheet.  For example, if a bank loans me money to buy a house, it will have that loan on its balance sheet as an asset.  But the deposit will be on the balance sheet of the seller's bank, wouldn't it?  Or am I missing something.
Wabuffo has a better grasp and you would get a shorter and more illuminating answer form him but here's goes a too long attempt. The following may appear simplistic but I also find that the basics of the banking system are not well understood, perhaps at all levels of the hierarchy and sophistication.

First, it is a chicken and egg type of question to a certain degree and your example of bank A ending up with a leaving deposit created from the loan to bank B, given the circularity of the circulation within a relatively closed and steady-state fractional reserve loop, could be imagined to be matched by a scenario where a reciprocal and matching series of transactions from bank B to bank A occur, negating the money creation effect by allowing banks to do their basic mission: act as an intermediary for a profit.

But it is useful to apply the concept explained by wabuffo without the matching transactions because it fits better with the real world, it helps to understand what central banks are trying to do and because it underlines, conceptually, that money creation essentially happens when a loan is agreed upon at a bank (not the classic definition of banks looking for a use for their deposits).

So, bank A, seen in isolation, makes a loan, creates a deposit and then looks for reserves and capital. When this occurs and money is created, there a four accounting entries (all increase) for the bank and the client. As trees don't grow to the sky (unless you're a central bank), restraints have been put in place to keep this powerful process under (relative) control so that the bank, in substance, also is required two more accounting entry-equivalent 'liabilities': a reserve requirement related to the deposit and a capital requirement related to the loan. If the deposit liability remains at the bank, the requirement can be satisfied many ways including borrowing reserves in the Fed Funds Market (a hot topic these days). To meet the capital requirement, the bank can raise capital many ways (raise equity or equivalent and/or use retained earnings, some of it potentially coming from fees related to the loan made).

Linking with the non-bank lending part, to raise capital for liquidity purposes (deposit leaving to bank B), bank A has many options, many of which have to do with a regulatory moat nature, including using its loan asset as collateral, with a tiny haircut. Non-bank lenders have expanded in the mortgage market due to the big banks' reluctance with lower credit scores and have espoused technology related to the origination process, which has been equated to perceive them as fintech entrants but non-bank lenders rely, for funding, on the wholesale short-term market, do not have access to the Federal Reserve System or the FHLBS and rely on the big banks for much of the direct and indirect funding. See below, if interested, for the funding profile of various non-bank lenders according to size. I would say this is a relevant exercise because of the way we've come out of the GFC since business cycles have inevitably become more like credit cycles.
https://www2.deloitte.com/us/en/insights/industry/financial-services/cost-of-funding-survey-nonbank-online-lenders.html

A feature that needs to be incorporated in the non-bank lender analysis is that they operate, to some degree, in the 'shadow', have grown market share ++ in the lower credit scores space (will tend to show higher realized and perceived credit losses when applicable), will see higher losses while relying on funding whose cost will rise concurrently and in a context where big banks have built a regulatory safety net that is much less robust for non-bank lenders as it only percolated to the securitization space.

Non-bank lenders can be good investments (case by case and given certain holding periods) and the mortgage sector is in a better shape compared to the subprime epoch but it seems to me that non-bank lenders are the ones trapped in a situation where the big banks will relatively benefit from the asset-liability mismatch that is bound to happen over the whole cycle and that mismatch will be magnified by the regulatory closed loop that has developed. It seems to me that big banks will be there, with assistance, to pick up the pieces, including the technology related to the origination process and all the advantages that come with that.

KJP

  • Hero Member
  • *****
  • Posts: 870
Re: Are big banks value traps ?
« Reply #57 on: October 21, 2019, 07:15:04 AM »
I don't think you understand what I am saying.  I believe you have the causation backwards for the banks. 

That is not how the current monetary system works.   The order is (1) banks create a loan, which (2) creates a deposit. Sure a few deposits switch from one bank to another but on the whole its not a big factor.  This is because banks are federally chartered by the US Treasury and the Federal Reserve.  They don't need to gather deposits - for the most part they create them.   Branch operations are not an input cost for deposits when you are talking banks.
Yes, I did not understand what you were saying. Thanks for explaining your point further. 

I understand that a bank making a loan (a bank asset) creates a deposit (a bank liability) somewhere in the banking system. I also understand that banks makes loans first and independently manages its capital requirements later.

What I don't follow is why making a loan necessarily creates a deposit on the lending bank's balance sheet.  For example, if a bank loans me money to buy a house, it will have that loan on its balance sheet as an asset.  But the deposit will be on the balance sheet of the seller's bank, wouldn't it?  Or am I missing something.
Wabuffo has a better grasp and you would get a shorter and more illuminating answer form him but here's goes a too long attempt. The following may appear simplistic but I also find that the basics of the banking system are not well understood, perhaps at all levels of the hierarchy and sophistication.

First, it is a chicken and egg type of question to a certain degree and your example of bank A ending up with a leaving deposit created from the loan to bank B, given the circularity of the circulation within a relatively closed and steady-state fractional reserve loop, could be imagined to be matched by a scenario where a reciprocal and matching series of transactions from bank B to bank A occur, negating the money creation effect by allowing banks to do their basic mission: act as an intermediary for a profit.

But it is useful to apply the concept explained by wabuffo without the matching transactions because it fits better with the real world, it helps to understand what central banks are trying to do and because it underlines, conceptually, that money creation essentially happens when a loan is agreed upon at a bank (not the classic definition of banks looking for a use for their deposits).

So, bank A, seen in isolation, makes a loan, creates a deposit and then looks for reserves and capital. When this occurs and money is created, there a four accounting entries (all increase) for the bank and the client. As trees don't grow to the sky (unless you're a central bank), restraints have been put in place to keep this powerful process under (relative) control so that the bank, in substance, also is required two more accounting entry-equivalent 'liabilities': a reserve requirement related to the deposit and a capital requirement related to the loan. If the deposit liability remains at the bank, the requirement can be satisfied many ways including borrowing reserves in the Fed Funds Market (a hot topic these days). To meet the capital requirement, the bank can raise capital many ways (raise equity or equivalent and/or use retained earnings, some of it potentially coming from fees related to the loan made).

Linking with the non-bank lending part, to raise capital for liquidity purposes (deposit leaving to bank B), bank A has many options, many of which have to do with a regulatory moat nature, including using its loan asset as collateral, with a tiny haircut. Non-bank lenders have expanded in the mortgage market due to the big banks' reluctance with lower credit scores and have espoused technology related to the origination process, which has been equated to perceive them as fintech entrants but non-bank lenders rely, for funding, on the wholesale short-term market, do not have access to the Federal Reserve System or the FHLBS and rely on the big banks for much of the direct and indirect funding. See below, if interested, for the funding profile of various non-bank lenders according to size. I would say this is a relevant exercise because of the way we've come out of the GFC since business cycles have inevitably become more like credit cycles.
https://www2.deloitte.com/us/en/insights/industry/financial-services/cost-of-funding-survey-nonbank-online-lenders.html

A feature that needs to be incorporated in the non-bank lender analysis is that they operate, to some degree, in the 'shadow', have grown market share ++ in the lower credit scores space (will tend to show higher realized and perceived credit losses when applicable), will see higher losses while relying on funding whose cost will rise concurrently and in a context where big banks have built a regulatory safety net that is much less robust for non-bank lenders as it only percolated to the securitization space.

Non-bank lenders can be good investments (case by case and given certain holding periods) and the mortgage sector is in a better shape compared to the subprime epoch but it seems to me that non-bank lenders are the ones trapped in a situation where the big banks will relatively benefit from the asset-liability mismatch that is bound to happen over the whole cycle and that mismatch will be magnified by the regulatory closed loop that has developed. It seems to me that big banks will be there, with assistance, to pick up the pieces, including the technology related to the origination process and all the advantages that come with that.

Thanks to you and Wabuffo for posting your thoughts.  Does a bank ("Bank A") gain any benefit from attracting existing depositors to move their deposits (which you can assume are paid very little in interest) to Bank A from other banks?  I believe the branchless banking argument assumes that there is a significant benefit from having a large deposit base on which costs you very little to attract.  Is that correct?  If so, what is the benefit?

wabuffo

  • Sr. Member
  • ****
  • Posts: 323
    • Twitter
Re: Are big banks value traps ?
« Reply #58 on: October 21, 2019, 07:56:01 AM »
KJP - I think Cigarbutt is a better writer than I am so he probably explains things better than I can...

Here's how I think about banks (and non-banks) within our current monetary and credit creation system.  You need to think of the US monetary system as two closed-loops:

1) Bank Reserves:  as we discussed upthread this is a closed loop in which only the Federal Reserve and the federally-chartered banks play.  The currency here is reserves which are deposits at accounts at the Federal Reserve and can only be traded between the banks and the Fed. 

It has two purposes - the accounts are used to clear the bank payment system which is run by the Federal Reserve.  Reserves look stable but they fluctuate wildly intra-day as the US banking system processes billions (sometimes trillions) in bank payments between US banks on behalf of private sector commercial activity.  Its other purpose is that it acts as a policy lever for the Federal Reserve to manage short-term interest rates.  The way the Fed does this was through a "corridor" system before the GFC.  Today, the Fed manages interest rates through a "floor system" where it forces the banks to hold excess reserves at the Fed and pays them an interest rate on those reserves.  The amount of reserves are a policy variable that depends on the interest rate management mechanism being used by the Fed.  The size of the reserve isn't for the payment system volatility as banks like JPM used to manage their payments with just $2B in reserves at the Fed before the GFC and now they've had to hold as much as $500B in recently quarters.

2) Credit Creation:  again, as discussed banks and non-banks both create credit though as we've seen they do it differently.   The most important drivers of credit creation besides regulations and capital are: collateral and risk-appetite.   The one thing that doesn't regulate lending is the level of reserves.  This is what people misunderstand. 

All of these requirements fluctuate and lead to boom and bust.  Twas ever thus.   Collateral is the underappreciated aspect to our modern credit system.  Borrowing and lending is based on collateral.  Sometimes when risk appetite is low - what will be accepted as collateral is strict (eg. only risk-free Treasuries in an extreme case like the GFC).  At other times - even subprime mortgages are accepted with very little haircut.

I think the recent example of the overnight repo blow-up in mid-Sept shows the intersection between system 1 (reserves) and system 2 (credit creation) and how they can interact in unintended ways.  It was head-scratching that the big banks with trillions in excess reserves (cash on deposit at the Federal Reserve) couldn't/wouldn't take a few billion and lend it overnight at close to 10% in exchange for risk-free collateral (Treasuries).   I think this is why people get confused with reserves and lending.   I could go more into detail on this example if you're interested - but this post is already long and rambling.

As to deposits and branch economics - I remember when ATM's came out in the 1970s and 80s - everyone forecast that bank branches would be obsolete.  That was a major technological advance and yet branches are still ubiquitous.  I think its because branches serve an evolving and different purpose than deposit-gathering.  The banking industry employs more people now than it did in the 1970s despite less banks and more automation and technology.

wabuffo
« Last Edit: October 21, 2019, 08:24:59 AM by wabuffo »

KJP

  • Hero Member
  • *****
  • Posts: 870
Re: Are big banks value traps ?
« Reply #59 on: October 21, 2019, 08:26:46 AM »
KJP - I think Cigarbutt is a better writer than I am so he probably explains things better than I can...

Here's how I think about banks (and non-banks) within our current monetary and credit creation system.  You need to think of the US monetary system as two closed-loops:

1) Bank Reserves:  as we discussed upthread this is a closed loop in which only the Federal Reserve and the federally-chartered banks play.  The currency here is reserves which are deposits at accounts at the Federal Reserve and can only be traded between the banks and the Fed. 

It has two purposes - the accounts are used to clear the bank payment system which is run by the Federal Reserve.  Reserves look stable but they fluctuate wildly intra-day as the US banking system processes billions (sometimes trillions) in bank payments between US banks on behalf of private sector commercial activity.  Its other purpose is that it acts as a policy lever for the Federal Reserve to manage short-term interest rates.  The way the Fed does this was through a "corridor" system before the GFC.  Today, the Fed manages interest rates through a "floor system" where it forces the banks to hold excess reserves at the Fed and pays them an interest rate on those reserves.  The amount of reserves are a policy variable that depends on the interest rate management mechanism by the Fed.  It isn't for the payment system as banks like JPM used to manage their payments with just $2B in reserves at the Fed before the GFC and now they've held as much as $500B in reserves at the Fed recently.

2) Credit Creation:  again, as discussed banks and non-banks both create credit though as we've seen they do it differently.   The most important drivers of credit creation besides regulations and capital are: collateral and risk-appetite.   All of these requirements fluctuate and lead to boom and bust.  Twas ever thus.   Collateral is the underappreciated aspect to our modern credit system.  Borrowing and lending is based on collateral.  Sometimes when risk appetite is low - what will be accepted as collateral is strict (eg. only risk-free Treasuries in an extreme case like the GFC).  At other times - even subprime mortgages are accepted with very little haircut.

I think the recent example of the overnight repo blow-up in mid-Sept shows the intersection between system 1 (reserves) and system 2 (credit creation) and how they can interact in unintended ways.  It was head-scratching that the big banks with trillions in excess reserves (cash on deposit at the Federal Reserve) couldn't/wouldn't take a few billion and lend it overnight at close to 10% in exchange for risk-free collateral (Treasuries).   I think this is why people get confused with reserves and lending.   I could go more into detail on this example if you're interested - but this post is already long and rambling.

As to deposits and branch economics - I remember when ATM's came out in the 1970s and 80s - everyone forecast that bank branches would be obsolete.  That was a major technological advance and yet branches are still ubiquitous.  I think its because branches serve an evolving and different purpose than deposit-gathering.  The banking industry employs more people now than it did in the 1970s despite less banks and more automation and technology.

wabuffo

Thanks for the additional thoughts.  I understand the point about federally-chartered banks having an advantage over non-banks.  What I'm still unclear about is the benefit, if any, of a large deposit base.  I've always assumed (without much thought) that a bank's deposit base was cheap capital, and the larger its (cheap) deposit base, the better its NIM (and ultimately profitability) would be, holding the yield on its assets constant.  So, a large deposit franchise would be a significant advantage (i.e., lead to a more profitable bank than one that relied more on, for example, brokered CDs) that could be eroded by people taking their deposits elsewhere (e.g., federally-chartered branchless banks).

This potential risk might not be significant because (1) a large cheap deposit base isn't actually an advantage, or (2) depositors aren't likely to move to branchless banks, even assuming they can offer higher interest rates (I realize this is pushing back somewhat about the closed-loop point that moving deposits around isn't a big deal and will come out in the wash, but I ask that you indulge me).  I'd like to put (2) aside for a moment and just try to understand (1) -- is a cheap deposit base an advantage and, if so, why? 
« Last Edit: October 21, 2019, 08:35:04 AM by KJP »