Congressional lawmakers slammed US bankers this week for not raising interest rates on savings accounts held by everyday consumers despite a series of major increases in the federal funds rate by the Federal Reserve.
Interest rate increases by the Fed making it more expensive for banks and other financial institutions to borrow money from each other, and this theoretically extends the purchasing power of the dollar and brings down inflation.
But higher interest rates also make it more lucrative for banks to lend money, a revenue increase they could be passing onto consumers in the form of higher interest rates on basic savings and money market accounts.
On Wednesday, the Fed made its third straight three-quarter-point interest rate hike to bring the federal funds rate to 3.25 percent, the highest level since 2008. Fed forecasts showed that rates could reach 4.6 percent in 2023.
But the national average interest rate for savings accounts is 0.13 percent, according to a Sept. 14 weekly survey of financial institutions by Bankrate. The Federal Deposit Insurance Corporation puts that number at 0.17 percent, with money market accounts returning 0.18 percent and checking accounts returning 0.04 percent.
“One of the only silver linings in a rising interest rate environment is that savers are supposed to be rewarded for their savings,” Del. Michael San Nicolas (D-Guam) said during a hearing of the House Financial Services Committee Wednesday. The committee heard testimony from the heads of JP Morgan Chase, Wells Fargo and Bank of America, among other big US banks. “They’re supposed to see the interest that they earn on savings accounts go up.”
“Yet what we have here is a Fed funds rate that’s currently … at 2.5 percent,” he said. “That’s 2.5 percent with our depository institutions paying between 0.01 percent and 0.05 percent, which means that on risk-free money being put to the Fed, they’re making anywhere between 2.45 percent and 2.49 percent on the deposits of their customers.”
Sen. Jack Reed (DR.I.) made the same point Thursday in a meeting of the Senate Banking Committee.
“I’ll cut to the chase. Interest rates are going up, but deposit rates, which you pay for your deposits, are really stagnant — very, very low. It raises the question that [since you’re] making substantial amounts of money on these increased interest rates, why are you not beginning to raise interest rates on deposits?” he said.
In a statement to The Hill, Reed said banks should start paying their customers more.
“I’d like to see big banks offering deposit rates more in line with the federal funds rate,” he said. “People on a fixed income especially rely on their savings, and they’ve been getting the short end of the stick from big banks in terms of lower rates of return.”
The bankers pledged in both chambers to start raising deposit interest rates as the federal funds rate continues to climb.
But paying out less in interest while pulling in more from higher federal interest rates is one of the ways that big banks turn a profit. This difference is known in industry jargon as a “spread,” and has previously been touted by banks on earnings calls with investors.
“Retail banking revenues were up 6 percent, primarily driven by deposit spreads and volumes,” Mark Mason, the financial chief of Citigroup, said in July on the company’s second-quarter earnings call, as transcribed by financial media company The Motley Fool.
Charles Scharf, head of Wells Fargo, told the Senate Banking Committee that his company is “beginning to raise rates.” During an earnings call in July he said that “on the retail and the consumer side, the core rates haven’t changed much for the big banks.”
Critics of the banking industry say that banks love the current environment of rising interest rates because it allows them to get more money out of their customers.
“Banks love this problem we’re seeing right now because for them it’s a feature not a bug, one that makes every customer with a checking or savings account a juicier source of revenue to squeeze,” Carter Dougherty, spokesman for progressive lobbying group Americans for Financial Reform, said in an email to The Hill. “They can harvest higher interest rates on loans while paying less on deposits.”
Dougherty said a lack of competition within the financial industry is what allows banks to take more money from their customers without customers getting fed up and moving their money to a competitor or out of the banking system altogether.
“The basic problem is a lack of competitiveness in banking, which we measure by looking at consistently high profit margins. Basic consumer banking isn’t full of constant innovation that lowers cost for banks, or customers, and raises their profit margins; the business is still taking deposits and making loans. The other problem is that it’s hard to just pick up and walk away from your bank,” he said.
Citigroup pulled in $4.5 billion in profit in the second quarter of 2022 on $19.6 billion in revenue, for a profit margin of 23 percent. Wells Fargo had an 18 percent profit margin in the second quarter, and JP Morgan Chase had a 28 percent profit margin. These are far higher margins than many industries regularly see.
Lawmakers also noted that banks have gotten bigger over the pandemic, and Democrats called out consolidation in the form of financial mergers and acquisitions as a threat to consumers.
“Over the past several years, we’ve seen the system of banking in this country take a dramatic shift. Our nation’s largest banks have gotten ever bigger during the pandemic,” House Financial Services Committee Chairwoman Maxine Waters (D-Calif.) said.
“Regulators have rubber stamped these merger applications for far too long, and it’s past time we get to the bottom of who these mergers are actually benefiting,” she said.
Republicans warned bankers in both chambers not to pursue environmental and social equality objectives through targeted investment or compliance practices.
“Banks are currently at a critical crossroads,” Sen. Pat Toomey (R-Pa.) said to bank CEOs Thursday. “Accept the role that some liberals prefer, which is to have your institutions implement social policy on behalf of the state, or embrace your history as drivers and promoters of free enterprise and stay out of highly charged social and political issues. I strongly suggest you choose the latter path, and I suggest that if you don’t, you do risk being treated as public utilities by both parties in the future.”