FT: US bank gains in high interest rate era exceed $1 trillion

A Financial Times analysis of official data concluded that US banks have made an unexpected $1 trillion in gains from the Federal Reserve’s two-and-a-half-year high interest rate period.

According to CNN, a review of Federal Deposit Insurance Corporation data showed that banks received higher returns on their deposits with the Federal Reserve but kept interest rates low for many savers, and the support received by more than 4,000 banks in the United States helped boost profit margins.

While interest rates on some savings accounts were raised in line with the Federal Reserve’s target of more than 5 percent, 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, U.S. banks were paying their depositors an average of just 2.2 percent in annual interest, according to data that includes accounts that don’t earn interest at all. That’s up from the 0.2 percent they paid two years ago, but far below the Federal Reserve’s one-day deposit rate of 5.5 percent, which banks receive.

The annual deposit yields at JPMorgan and Bank of America were 1.5 percent and 1.7 percent, respectively, according to the data.

The lower deposit payments generated $1.1 trillion in interest spreads for banks, or nearly half the total dollars they brought in during that period.

That’s in sharp contrast to Europe, where some governments have imposed windfall profits taxes on banks that benefited from higher interest rates.

The Federal Reserve tightened its key interest rate last week, cutting it by half a percentage point, and some U.S. banks have sought to pass the cuts on to depositors as quickly as possible, a move that would continue to support their margins.

Hours before the Federal Reserve cut interest rates on Wednesday, Citibank told its employees that if the U.S. central bank cut rates by half a percentage point, the bank would do the same with accounts earning 5 percent or more, according to a person familiar with the matter.

Citibank’s wealthiest clients typically receive preferential rates.

At JPMorgan, bankers were told that customers with $10 million or more in cash would see their savings rates cut by 50 basis points in tandem with the Fed’s actions, according to people familiar with the matter, and that the bank’s rates would continue to be tied to the Fed’s moves.

Chris McGraty, head of U.S. banking research at KBW, said that because of the Fed’s rate cut, banks will certainly be able to cut their deposit costs, but the severity of the cuts will vary from bank to bank. When the Fed began tightening monetary policy in March 2022, many analysts expected that competition from new fintech companies and the increasing ease with which consumers could transfer money would force banks to raise interest rates on deposits to keep depositors loyal.

But the FT’s calculations show that they were able to retain most of the interest, albeit slightly less than in previous Fed tightening cycles.

The collapse of Silicon Valley Bank in 2023 forced many medium-sized and small banks to raise interest rates to prevent depositors from fleeing, but larger banks saw an influx of cash during that flight to safety, allowing them to delay the need to match higher rates elsewhere.

In all, US banks captured about two-thirds of the interest on the Fed’s rate hikes from March 2022 to the middle of this year, according to FT calculations based on the latest available data, even after banks paid depositors almost $600bn in interest.

The last time the Fed raised interest rates, from early 2016 through early 2019, U.S. banks captured 77 percent of the interest.

Although the Fed has now begun to ease monetary policy, bank stocks reacted positively to the news on Thursday, as investors bet that lower rates and a relatively strong economy will create more demand for borrowing and boost investment banking activity.

But there’s one thing that has kept U.S. banks from capturing the gains: The highest interest rates in 40 years have sent about $3 trillion into certificates of deposit, the highest yield in history for such certificates, which earn the highest interest rate of any bank deposit and whose rates can’t be adjusted overnight.

As that money is freed up, banks will be able to adjust their rates lower, but not before, analysts said.