Congressional lawmakers this week criticized US bankers for failing to raise interest rates on savings accounts held by everyday consumers despite a series of major Federal Reserve rate hikes on federal funds.
The Fed’s raising interest rates makes it more expensive for banks and other financial institutions to borrow money from each other, and this theoretically extends the dollar’s purchasing power and reduces inflation.
But higher interest rates also make it more profitable for banks to lend money, an increase in revenue they could pass on to consumers in the form of higher interest rates on basic savings and money market accounts.
On Wednesday, the Fed made its third consecutive three-quarter hike in interest rates to bring the federal funds rate to 3.25%, the highest level since 2008. The Fed’s forecasts showed that rates could reach as high as. 4.6% in 2023.
But the national average interest rate for savings accounts is 0.13 percent, according to one September. 14 Weekly Survey of Bankrate Financial Institutions. 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 positives in an environment of rising interest rates is that savers should be rewarded for their savings,” Del. Michael San Nicolas (D-Guam) said Wednesday during a hearing of the House Financial Services Commission. The committee heard testimony from the heads of JP Morgan Chase, Wells Fargo and Bank of America, among other large US banks. “They should see the interest they earn on savings accounts increase.”
“Yet what we have here is a Fed funds rate that is currently … 2.5 percent,” he said. “This is 2.5% with our depository institutions paying between 0.01% and 0.05%, which means that on risk-free money placed in the Fed, they are earning between 2.45% and 2.49% on their customers’ deposits “.
sen. Jack Reed (DR.I.) did the same Thursday at a meeting of the Senate Banking Committee.
“I’ll get to the point. Interest rates are going up, but the deposit rates, which you pay for your deposits, are really stagnant, very, very low. The question arises that [since you’re] earning substantial sums of money with these increased interest rates, why aren’t you starting 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 the big banks offer deposit rates more in line with the federal funds rate,” he said. “People with fixed incomes are mostly dependent on their savings and have gotten the shortest part of the stick from the big banks in terms of lower rates of return.”
Bankers have pledged in both chambers to begin raising deposit interest rates as the federal funds rate continues to rise.
But paying less interest while withdrawing more from the higher federal interest rates is one of the ways big banks make a profit. This difference is known in industry jargon as “spread” and was previously touted by banks when asking for profits with investors.
“Retail banking revenues increased 6%, mainly driven by spreads and deposit volumes,” Citigroup chief financial officer Mark Mason said in July on the company’s second quarter earnings call. as transcribed by the financial media company The Motley Fool.
Charles Scharf, head of Wells Fargo, told the Senate Banking Committee that his company “begins to raise rates.” During an earnings call in July, he said that “on the retail and consumer side, policy rates haven’t changed much for the big banks.”
Critics of the banking industry say banks love the current environment of rising interest rates because it allows them to get more money from 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 account or savings account a juicier source of income to squeeze,” Carter Dougherty, spokesperson of the progressive lobbying group Americans for financial reform, he said in an email to The Hill. “They can raise higher interest rates on loans by paying less on deposits.”
Dougherty said the lack of competition within the financial sector is what allows banks to withdraw more money from their customers without the customers getting tired and transferring their money to a competitor or outside the banking system.
“The underlying problem is the lack of competitiveness in the banking sector, which we measure by observing consistently high profit margins. Basic consumer banking is not filled with constant innovation that lowers costs for banks or customers and increases their profit margins; the company is still taking deposits and making loans. The other problem is that it’s hard to withdraw and walk away from your bank, ”he said.
Citigroup achieved a profit of $ 4.5 billion in the second quarter of 2022 on revenues of $ 19.6 billion, with a profit margin of 23%. Wells Fargo had an 18% profit margin in the second quarter and JP Morgan Chase had a 28% profit margin. These are much higher margins than many industries see on a regular basis.
Lawmakers also noted that banks got bigger as a result of the pandemic, and Democrats called consolidation in the form of financial mergers and acquisitions a threat to consumers.
“In recent years, we have seen the banking system in this country take a dramatic shift. Our nation’s largest banks got bigger and bigger during the pandemic, ”said House Financial Services Committee chair Maxine Waters (D-Calif.).
“Regulators have been approving these merger applications for far too long, and it’s been time that we dig into who are actually benefiting from these mergers,” he said.
Republicans have warned bankers in both chambers not to pursue social and environmental equality goals through targeted investment or compliance practices.
“Banks are currently at a critical crossroads,” Sen. Pat Toomey (R-Pa.) Told 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 the propellers and promoters of free enterprise and stay out of highly charged social and political issues. I highly recommend choosing the latter path and suggesting that otherwise, you risk being treated as a public utility by both sides in the future. ”