[G3rn0ti]

So why can’t banks provide higher yields with simple savings accounts? If it’s got nothing to do with federal fund rates or middle men?

Here in Europe banks are entering an existential crisis as the ECB maintains zero and negative interest rates (of course, this is simplified as there are actually several different federal funds). Banks can’t finance their business anymore. This led to increasing bank fees, bank mergers and basically bad service for their customers including no interest paid on savings.

Defi will sweep away the banking market on the long run if central banks keep doing their lax monetary policy for much longer.

[tonfa]

> So why can’t banks provide higher yields with simple savings accounts? If it’s got nothing to do with federal fund rates or middle men?

Because banks are regulated (to avoid systemic risks), so they need to balance deposits with risk free loans (or discounting the riskier loans with extra capital).

> Defi will sweep away the banking market on the long run if central banks keep doing their lax monetary policy for much longer.

By definition if they provide higher yields, this should be because they are riskier. (It might be a non-obvious risk, e.g. liquidity risk due to lack of lender of last resort).

[G3rn0ti]

> they need to balance deposits with risk free loans

You mean "reserves". This is the reserve requirement of banks which they need to hold for deposits. These reserves are held by their responsible central bank. Which they need to pay for in the Euro zone (that's what it means federal fund rates being negative). So this gets me back to my initial point: Banks depend on the federal fund rates. DeFi systems do not.

But I agree with you, higher yields do reflect higher risks. Of course, depositing money in DeFi protocols is still riskier than leaving it on your bank. But bringing money to your bank means you're so risk averse you're willing to lose money for keeping your money. At least inside the Euro zone, currently.

[lottin]

> So why can’t banks provide higher yields with simple savings accounts?

Because yield is the price that borrowers pay for borrowing funds. When there are a lot of funds available for borrowing and not many people wanting to borrow yields will fall. There is just nothing central banks or commercial banks can do to raise yields if there is little demand for loans.

[G3rn0ti]

> There is just nothing central banks or commercial banks can do to raise yields if there is little demand for loans.

I am sorry but I think you've got this completely the wrong way. The demand for loans did not shrink in the last couple of years: Look at the housing prices (including the infamously high rents) and the volume of credits people burden themselves with. Rather, the amount of liquidity (i.e. money) circulating around has increased significantly. This pushed interest rates down to a minimum. And why is that so? It's because central banks are flooding the economy with money for years. So it is well within their power to change that. But it won't be nice for many parts of our inflated economies ...

[lottin]

This is not how banks operate. When a bank makes a loan, the bank creates a new deposit in its balance sheet, in effect creating new money out of thin air. [1] Most of the money in circulation is created by banks in this way. This means banks don't need liquidity to make loans, because they can create their own liquidity. And, yes, the demands for loans in the EZ crashed during the financial crisis and hasn't recovered ever since, which explains the low interest rates.

[1] https://en.wikipedia.org/wiki/Money_creation#Role_of_banks_i...