An analysis of official data by the Financial Times (FT) has revealed that US banks have benefited to the tune of $1 trillion from the Fed’s two and a half years of high interest rates.
An analysis of data from the Federal Deposit Insurance Corporation (FDIC) showed that lenders earned higher returns on their deposits with the Fed, but kept interest rates lower for many savers.
The support provided to more than 4,000 US banks helped boost profit margins. While rates on some savings accounts were raised in line with the Fed’s target of more than 5%, the vast majority of depositors, especially those at the largest banks such as JPMorgan Chase and Bank of America, received much less.
At the end of the second quarter, the average US bank was paying depositors just 2.2 per cent a year, according to regulatory data, which includes accounts that pay no interest at all. That is higher than the 0.2 per cent they paid two years ago, but much lower than the 5.5 per cent Fed overnight rate that banks can charge.
According to the data, the annual cost of holding deposits at JPMorgan and Bank of America is 1.5 per cent and 1.7 per cent respectively. The FT calculates that these lower payments to depositors have meant $1.1 trillion in excess interest income for the banks.
Banks cut deposit rates before Fed
When the Federal Reserve cut its key interest rate by half a percentage point this week, some US banks rushed to pass the cuts on to depositors to boost profits.
Hours before the Fed’s rate cut last Wednesday, Citi told employees at its bank, which typically offers preferential rates to wealthy clients, that if the US central bank cut rates by half a percentage point, the bank would also cut its rate on accounts paying 5 per cent or more, according to a person familiar with the matter.
JPMorgan also said savings rates for clients with $10 million or more in cash would be cut by 50 basis points and that future cuts would be in line with the Fed’s actions.
Chris McGratty, head of US bank research at KBW, said banks would ‘absolutely’ be able to cut deposit costs as a result of the Fed’s rate cut, adding: ‘I think the level of aggressiveness will vary from bank to bank.
JPMorgan said it aims to ‘offer a fair and competitive rate’. Citi and Bank of America declined to comment.
Flight from small and medium-sized banks favours the big ones
Banks seem to be slow to raise the interest rates they offer on deposits and savings accounts, and fast to cut them.
When the Fed began tightening monetary policy in March 2022, many analysts predicted that competition from new financial technology companies and the increasing ease with which consumers carry cash would force banks to give depositors a greater share of higher rates.
But the FT’s calculations show that banks have been able to retain most of the gains, albeit slightly less than in previous Fed tightening cycles.
The collapse of some banks, including Silicon Valley Bank in early 2023, forced many mid-sized and smaller banks to raise rates to prevent depositors from fleeing. Larger banks saw an increase in cash flow during the flight of depositors from these small and mid-sized banks, allowing them to postpone the need to adjust to higher interest rates.
According to FT calculations based on the latest available data, US banks received about two-thirds of the revenue from the Fed’s higher rates from March 2022 to the middle of this year.
Banks paid out about $600bn in interest to depositors. In the period from early 2016 to early 2019, when the Fed last raised rates, US banks earned 77 percent of the revenue.
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