Banks are used to relieve inflation. Now they take advantage
Bloomberg – The last time inflation burned, consumers could put money in the bank and watch it rise like prices on store shelves, easing much of the pain.
Not this time – and it’s fueling profits for US lenders.
The gap between what banks pay to depositors and what they earn by lending money to borrowers hasn’t been nearly as wide over the past half-century, with the average savings account paying only a measly 0.06%. Many banks are telling shareholders that so-called deposit betas — measuring how quickly deposit rates rise following Fed hikes — will continue to benefit banks in the months ahead because they don’t feel still a lot of pressure to pay savers more.
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Betas are now the hottest jargon in the financial industry. The phrase was invoked more times during Bank of America Corp analyst briefings. in the last two months than in the previous two years combined. This month, the lender’s executives predicted interest income could climb as much as $1 billion in the third quarter from the second as they remain “disciplined” in what they pay customers.
“Our retail banking segment continues to see good momentum,” Chief Executive Brian Moynihan told analysts on July 18. “We grew lending at the fastest quarterly rate in nearly three years.”
The reasons why savers are getting so little relief are myriad, starting with the Federal Reserve, which waited until inflation was strong before starting to raise interest rates from long-held lows. From there, it takes time for deposit rates to increase as well. The result is painful: the consumer price index jumped 9.1% in June, while banks such as JPMorgan Chase & Co., Bank of America and Wells Fargo & Co. offered deposit rates as low as 0.01%, according to their websites.
Although deposit rates are expected to rise gradually as Fed rate hikes for borrowers take hold, there is ample evidence that the benefits for savers will come slowly. Indeed, many banks are under little competitive pressure to pay more. Many are teeming with cash, thanks in part to a surge in deposits that have piled up during Covid-era shutdowns and stimulus programs.
Even large customers who don’t do much business with a bank outside of parking their money will have little leverage to lobby for a higher interest rate on their deposits.
“Banks have a lot of leeway on the funding side,” said Erika Najarian, banking analyst at UBS Group AG. This means that they can allow “deposit-only relationships that are more sensitive to walk rates because they don’t necessarily need that funding.”
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While deposits have fallen somewhat at many banks, enough consumers are unlikely to switch lenders to quickly increase the pressure, even as online and community institutions raise rates to attract inflows. Synchrony Financial and American Express Co., for example, each offer rates of at least 1.5%.
One of the reasons for this inertia is that only people of a certain age can remember a time when banks regularly paid much higher interest on deposits, mitigating the impact of inflation. Another is that accounts aren’t as portable as they were decades ago. Many customers have their paychecks deposited directly and have bills paid automatically, making it difficult to switch to a new bank.
To be sure, the more generous rates paid by banks for deposits in the 1980s were the result of long-standing inflation and the Fed’s efforts to bring it under control with much higher interest rates for borrowing.
This time, interest rates and deposit rates have hit rock-bottom lows, said Greg McBride, chief financial analyst at Bankrate.com, which tracks deposit rates offered by banks. Banks will want to see the benefits of higher borrowing rates before they start passing them on to savers, he said.
Getting higher deposit rates will also depend on how long the Fed keeps borrowing rates high, Najarian said. It suggests that deposit rates could reach 1.2% before the Fed begins to ease again.
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