Savers may bemoan low returns on their bank savings, but collectively their conservative actions gift cheap funds to banks. Until those collective reactions change, banks have few reasons to offer more generous rates

David has raised here many good points indeed. Good article. Maybe he should have taken the opportunity to highlight that the best approach to risk minimization is appropriate asset class allocation and diversification, based of course on the time horizon and profile of the individual investor. In general, keeping everything as TD's does not minimize overall risk. 

Find it a bit weird the constant bank bashing on low term deposit rates. I think people need to realise that if you have a large chunk of change earning what I consider is free money then you will be more than happy when rates hit 5% for the 1 year by Christmas. The way other so called Investments are tanking of late your more interested in just the return of your investment rather than returns on your investment.

Interesting viewpoints. Ultimately banks don't want savers as they are not profitable. So we don't see any competition. The banks really only offer them due to regulatory capital requirements.

I imagine the savers would react differently if we saw one bank permanently sitting at 50-100 basis more than their competition. 

Given the 5 year for most banks is 4%, and we are likely to be at that rate or higher in on-call accounts by the end of the year, why would you lock it away? You will likely be losing money on 4 of those years.

Given current circumstances who the heck would lock in for 2 or more years wth a 3.x rate?

Surely it means that people with money are investing it in other places: rental houses, sharsies, pension funds, private investment funds etc and not in bank TDs.

Bit short sighted of the banks not to find ways to divert this money into TDs...  as the rates offered are too low vs other safe investment options.

So - the question would be, as a % of total investments how much in NZ is in TD's vs other investment options. and how does that compare with overseas markets.

We know we have been skewed towards housing, the success of sharsies shows that people are keen to try different options...  so i suspect if banks improved their offerings, more people would deposit more money?

David-quick question.

If TDs are guaranteed by the Government and subject to OBR, would a bond provide more or less security with the same bank e.g. ASB. In the event of a default who gets priority, the TD or the bond holder? Thank you.

maybe we should be pointing our finger at the deposit takers who are offering a return no better than banks with a lot more risk.

This is a clear consequence of investor behavior, not savers'. In the past few years it's been very profitable to get into huge debt (until it suddenly wasn't) and banks knew it and fed off it. They changed their whole business model to feed off it, and neglected savers. But as we've seen things are rapidly changing.

I think the government and reserve bank's mistake was relying on commercial banks to regulate the economy and look after money, as if they weren't just out to make a big profit for themselves.

Great and interesting article which I think makes some fair calls but it misses a few key points too:

- Extraordinary RBNZ direct funding support to banks has also played a significant part in keeping real interest rates unappealing for traditional savers.  And with inflation where it is, it is still unappealing, particularly after tax.

-Wholesale fixed income investors are more constrained in what they can invest in and are often only interested in outperforming a benchmark index.  They therefore see value much differently.

- As someone else mentioned, the cost of operating a retail funding base is not trivial compared to a wholesale fund borrowing programme.  Banks would, therefore pay less for retail deposits than bonds, all else being equal. 

- The willingness of retail depositors to switch TDs is constrained by the pain the awse AML requirements they make you jump through - a regulatory barrier to competition.

-  Although currently there is no government guarantee and OBR for retail depositors, it might be reasonable to suggest that they would get looked after ahead of senior unsecured bondholders in an event of market stress, like all those voters in Timaru and Ashburton when South Canterbury Finance collapsed.  i.e. wholesale funders get shafted and should demand more compensation.

- It is true that retail depositors tend to invest short because of liquidity preferences (not withstanding their dim view on the attractiveness of longer TD rates) and therefore are willing to accept a lower return for that relative liquidity.  That they, on average tend to roll over their TDs and would therefore be better off, on average, to invest longer term, that does not hold for the individual who may or may not need the liquidity.  

- Related to the above, break 'costs' for TDs are skewed in the bank's favour.  The longer the TD the more chance of breaking it and the more chance of losing the opportunity cost.

As several have commented already, if the difference between a major bank's TD rate is less than 1% between it's 1 year and 5 year terms, why would you lock it away for a longer period, particularly in the current climate? 

It is benificiary to shop around. This week a ANZ term did mature and our initial plan was to shift it to a competitor offering a better rate (SBS Bank). After hearing about the competitors offer ANZ immediately raised their proposed rate to match it. So we stayed!

Great article, and I think this is the key point:

Obviously no one saver can do anything about [low TD rates]. But this is a clear consequence of overall saver psychology.

People don't tend to have enough savings for a difference of %1 here or there to make much of a meaningful impact on their decisions, at least not on an individual level. Investors pool funds to both spread risk and increase leverage. If savers got together to do the same thing, then perhaps banks would pay attention

I wonder - if people started moving their KiwiSavers to conservative/cash funds in anticipation of further stock market falls, would this put some pressure on banks to increase their TD rates? Or has everyone already bet that money on the housing market?

A half decent deposit guarantee from the RBNZ might help things along a bit when it comes to longer term deposits