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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: mishedlo who wrote (70906)	10/4/2006 10:40:15 AM
From: ridingycurve	Read Replies (1) \| Respond to of 110194

Chorus bank is offering 5.6% interest on CDs that supposedly are govt insurred. That is nuts. There should be some risk somewhere for chasing yield. There were several issues brought up last night regarding particulars of bank operations, the banking system as a whole, and the role of the government in regulating the system. I didn't have time to respond then, but hope to clear up what I judge to be some misconceptions as time permits. Sorry the response won’t be timely. I'm starting with Mish's post because it is perhaps the easiest to address. To wit, the FDIC does not insure interest, only principal, so the above quoted rate does not necessarily pose risk to the insurance fund unless the entire rate schedule has a gross negative impact on net interest income. Further, the rate of interest paid on a particular deposit category does not tell you anything. I would guess that in 90% of the time targeting a particular category of deposits is a function of interest rate risk management, such as duration matching assets and liabilities. It is also often the case that when higher than market rates are paid on one deposit category, market to lower than market rates will be paid on other deposit categories. Bear in mind that there is an inverse relationship between profitability and IRR management, so paying above market rates on a particular deposit category might actually represent conservatism rather than aggressiveness. A neutral interest rate position (assets and liabilities are duration matched) is the safest from a risk management perspective, but a negative interest rate position (liabilities reprice faster than assets) is usually the most profitable over longer timeframes among the three usual interest rate environments (rising, falling, and stable rates). In the example cited, it is very possible that Chorus is only attempting to lengthen or shrink the duration of its liabilities. One cannot know.