SAN FRANCISCO, June 18, 2020 /PRNewswire/ — For over a decade, Dr. Dan Geller has been advocating the Theory of Money Anxiety showing that high money anxiety leads to a massive hoarding of money in liquid bank accounts, which reduces the profitability of the banking sector due to mispricing of interest rates.  The influx of $1 trillion combined with the decrease of 29 basis points in net interest margins (NIM) in Q1 2020 support the main premise of the Theory of Money Anxiety, which is featured in the Journal of Applied Business and Economics.  

The Money Anxiety Theory, which was developed by Dr. Dan Geller during the 2008/2009 financial crisis, states that during economic uncertainty, when the level of money anxiety increases, people reduce their spending and increase their savings.  Moreover, the additional bank deposits goes to liquid accounts because it provides people with immediate access to the money in case of a financial need. This behavior is called «Mattress money» in behavioral economics because it resembles what people used to do before bank deposits were federally insured.

«I anticipated this behavior ever since I observed the same phenomenon during the 2008/2009 financial crisis,» said Dr. Dan Geller, the developer of the Theory of Money Anxiety and the President of Analyticom.  «I presented the Theory of Money Anxiety in numerus banking conferences, and even had the opportunity to discuss the theory with the FDIC Chairman Jelena McWilliams.  I think that the current validation, and future application, of the Theory of Money Anxiety will help the banking sector improve its financials.»

Bank deposits increased by $1.09 trillion during the first quarter of this year, which is over five times the average quarterly deposit of $192 billion in 2019.  The entire $1.09 trillion was deposited to liquid accounts, checking savings and money market.  Additionally, the average net interest margin declined 29 basis points from a year ago to 3.13 percent and quarterly net income fell by 69.6 percent from first quarter 2019 according to the latest quarterly report from the Federal Deposits Insurance Corporation (FDIC).

The Money Anxiety Index, which measures actual consumers’ financial behavior, increased by 9.1 points during the first quarter of this year – from 42.1 in January to 51.2 in March, when most people were ordered to «shelter in place» in order to prevent the spread of the corona virus.  This event initiated the economic uncertainty and the increase in the level of money anxiety. Consumers increased their bank savings fivefold in the first three months of 2020 in response to the increase in the level of money anxiety caused by the economic uncertainty related to COVID-19.  

The latest FDIC quarterly report indicates that net interest margins (NIM) declined 0.29 percent in Q1 2020.  This decrease is due, in part, to the mispricing of «Mattress money» deposits. The reason some institutions are experiencing lower NIM is partly because they did not optimize their rates to the Relasticity (Rate elasticity) factor of hoarding money, which is lower than saving money during normal times. Thus, their interest expense is higher than the Optimal Pricing Position, resulting in lower NIM.

The Theory of Money Anxiety is featured in the study on the «Dynamics of Yield Gravity and the Money Anxiety Index,» which has been peer reviewed and published in the Journal of Applied Business and Economics.  The study, coauthored by Dr. Dan Geller and Professor Nahum Biger, shows how the same phenomenon of hoarding money in liquid banking accounts occurred during the 2008/2009 financial crisis.  Moreover, the study shows how consumers are willing to forgo five times higher interest rates on their deposits in return for immediate access to their money.

About Analyticom LLC
Analyticom LLC is a behavioral economics research firm specializing in the application of behavioral economics in financial decisions.  The company is a pioneer in the study of behavioral economics in financial decision. For the first time ever, a scientific study co-authored by Dr. Dan Geller, the founder of Analyticom LLC, shows the impact of money anxiety on financial decisions.  The study, Dynamics of Yield Gravity and the Money Anxiety Index has been peer reviewed and published in the Journal of Applied Business and Economics and was presented by Dr. Geller in a keynote address at the Banking Analytics Symposium, and at the International Conference on Business and Economic Development.

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Dr. Dan Geller
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