[The nation’s biggest banks are netting big profits from rising
interest rates while ripping off everyone else.]
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THE GREAT BANK ROBBERY OF 2023  
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David Sirota
October 17, 2023
The Lever
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_ The nation’s biggest banks are netting big profits from rising
interest rates while ripping off everyone else. _

, Illustration by Lindsay Ballant/The Lever

 

_“It is easier to rob by setting up a bank than by holding up a bank
clerk.” — Bertolt Brecht _

The last time you checked your bank statement, did you take a moment
to look at the fine print that shows the interest rate you are being
paid on your deposits? If you did, you may have noticed that it still
seems pretty negligible, even though you’ve seen so many headlines
about the Federal Reserve hiking the interest rates that banks charge
for loans.

This is the Great Bank Robbery of 2023 — the yawning gap between
what you are paid on your deposits and what banks are earning from
other institutions when they loan out or invest your money. It’s a
caper that has quietly become a systemic upward transfer of wealth
thrumming beneath the macroeconomy — but as you’ll see below, the
theft can be stopped.

This particular heist is predicated on an asymmetry: Banks collect
depositors’ money and pay them very little interest, while using
depositors’ money to earn a lot more interest when the Federal
Reserve raises lending rates. Banks can earn those higher yields by
making high-interest loans to borrowers. They can also take advantage
of the Fed’s own interest rates for interbank lending
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their excess reserves at the central bank
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— and those rates are not available to the general public.

This spread isn’t new — the basic business of a bank is to collect
deposits, pay depositors’ some interest, and then make loans at
higher interest rates, with the difference used to pay for bank
services (tellers, ATM machines, etc.) and generate a fair profit from
such “net interest income.”

The larceny here is in the size of the gap between what banks are
paying savers and what banks can earn through the Federal Reserve.

That spread is now “at a modern high,” according to a recent Fed
report
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In an $18 trillion deposit market, that means savers are missing out
on hundreds of billions of dollars that are being skimmed off their
nest eggs and funneled to bankers and their shareholders. It means
bank statements showing almost no interest payments on your deposits,
while
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a
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series
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of
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recent
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earnings
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reports
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show banks reaping ever-higher profits from net interest income.

“The banks are getting free money from depositors to make loans and
investments with, but savers aren’t getting any share of the
gains,” former Federal Reserve counsel and current Cornell
University professor Robert Hockett told _The Lever_.

“Exploiting The Higher Interest Rate Environment”

Federal Reserve Chairman Jay Powell has said his interest rate hikes
aim to “get wages down
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— and that has started to happen
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But typically
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the other effect of such hikes is a boost in bank profits.

“When interest rates rise, profitability in the banking sector
increases,” Investopedia explains
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“Banks make money by accepting cash deposits from their customers in
return for interest payments and then investing that money elsewhere.
The bank’s profit is the difference between the interest they pay
their depositors and the yield they make through investing. Higher
interest rates increase the yield on their investments.”

The current moment is an extreme example of this axiom: Big banks are
reaping outsized payouts from net interest income
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because the spread between depositor payment rates and interest rates
has become so enormous.

Last month, the Federal Deposit Insurance Corporation reported
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that banks are on the whole paying a 0.4 percent interest rate to
depositors. At the same time, banks get paid on average more than 7
percent [[link removed]]
when they are making 30-year fixed rate mortgage loans. They are also
being paid more than 5 percent of interest
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when they park money at the Federal Reserve — and the Fed does not
require banks to pass on those government payments to depositors in
the form of higher interest payments.

Now zoom in and look at just the country’s five biggest banks, where
the government’s too-big-to-fail guarantees entice depositors with
special promises of safety that aren’t extended to customers of
other financial institutions. There, the _Wall Street Journal_
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estimates that since 2019, depositors have missed out on more than
$290 billion worth of interest they might have earned at better
interest rates at other banks or in different financial vehicles.

For Americans needing basic banking services, this translates into
predation. As Sen. Jack Reed (D-R.I.) noted in a recent letter
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spotlighting the scheme, a new Bank of America customer will receive
about “0.01 percent on a savings account, but pay 6.90 percent on a
mortgage and 15 percent to 27 percent on a credit card.”

Not surprisingly, that bank just reported $14 billion in net interest
income in the most recent quarter — a 25 percent increase.

“The biggest banks are exploiting the higher interest rate
environment to benefit their executives and shareholders, not the
ordinary Americans whose deposits provide the funding necessary for
those banks to operate,” Reed wrote in his letter
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to bank CEOs, demanding to know “why your bank still pays the same
very low interest rates on deposits even as it makes giant profits by
charging borrowers higher interest rates on loans.”

This is no fleeting anomaly, nor is it a bug — it is a feature.

A Federal Reserve study in 2013
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found that while banks are quick to lower payments to depositors when
government interest rates decline, they are slow to raise those
payments when interest rates increase. The analysis found that if the
speeds of change were similar in either direction, depositors would
earn roughly $100 billion a year more than they do in periods with
rising market rates. The discrepancy means the $100 billion is instead
pocketed by banks and their shareholders.

Too Big To Fail = Too Big To Pay A Fair Rate

Seven large banks responded to Reed’s inquiry with letters arguing
that the giant yield from the gap between their high loan rates and
low deposit payments isn’t naked profiteering, but is instead paying
for exceptional services for customers.

“Clients value the breadth and depth of the relationship for reasons
that go beyond the rates paid for deposits,” wrote Bank of America
in a typical response. “This includes, but is not limited to, our
best-in-class digital and mobile capabilities that provide our
customers with the ability to complete necessary banking services such
as depositing a check or transferring money in a safe and secure
manner, wherever they may be located.”

The argument parrots talking points from the Bank Policy Institute,
the industry’s lobby group, which insists
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“Deposits come with payment services — the ability to transmit or
receive funds, transfer balances between accounts or withdraw cash,
usually at no additional fee to the customer. All of these differences
are reasons why deposit rates should be expected to be below the fed
funds rate” — i.e., the Fed-created interbank interest rate that
banks themselves have access to but individual depositors don’t.

While it’s true that the spread between loan rates and deposit rates
provide banks with resources to provide basic services, it doesn’t
explain why that spread is at a _record_ high. After all, higher
interest rates do not mean banks suddenly need to spend more on ATM
machines, tellers, and customer website portals.

In truth, three factors have created this ripoff.

First and foremost, after a long era of lax antitrust enforcement, the
banking industry has become monstrously consolidated
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just 15 banks
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control more than three quarters of all deposits in America. When
these major banks insisted in their letters to Reed that they offer
“competitive rates,” that was technically true but also wildly
deceptive — they are the oligopolies that collusively set the
parameters of the competition.

“The market is dominated by a small number of big players,” wrote
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Frederic Malherbe, an economist at University College London. “It
may be the case that no major player has an incentive to deviate and
offer higher rates, as long as the others do not either.”

Second, these oligopolies not only face little serious competition for
depositors, they also benefited from $5 trillion of new deposits
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after customers placed emergency stimulus payments and PPP checks into
their accounts. That means banks have felt little immediate pressure
to compete for depositors by offering higher rates.

“Banks are likely to allow excess deposits to run off before
re-pricing deposits upward, which should support net interest income
and margins,” wrote Fitch analysts
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last year.

As Bankrate’s chief financial analyst told
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CNBC last year: “The biggest banks in particular are sitting on a
mountain of deposits, the last thing in the world they’re going to
do is raise what they’re paying on those deposits.”

At an investor presentation late last month, JPMorgan Chase’s chief
financial officer boasted about how little pressure the
too-big-to-fail behemoth now feels to pay depositors any more of the
spread.

“We are not going to chase every dollar of deposit balances,” he
declared, as JP Morgan is now projected to rake in $84 billion of net
interest income
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With this let-them-eat-cake attitude so pervasive in the banking
sector, why aren’t more Americans flipping off the big players and
chasing better yields at smaller banks or with different investment
vehicles? That gets to the third factor: customer stickiness.

Simply put, after a long era of near-zero interest rates, Americans
are not conditioned to shop their deposits, and the process
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itself can be a byzantine, time-consuming morass of paperwork and
esoterica.

Additionally, as financial panics generate headlines about midsized
banks teetering on the brink of collapse, depositors may be generally
hesitant to move. They may also be particularly averse to depart the
too-big-to-fail banks because of the government’s implicit backstop
guarantees that are not offered to other financial institutions.

Meanwhile, as the Bank Policy Institute notes
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the rise of automatic payments and direct deposits “may have made
deposit relationships stickier” — once you’ve taken the time to
set up your family’s banking process, you probably don’t want to
go through the pain in the ass of doing it all over again at another
bank, even if you might be able to get slightly higher interest
payments.

There’s a classic collective action problem at play here, too. For
the more than half of Americans
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who have less than $5,000 in savings, a few more points in interest
only translates to a few more bucks a year, so it may not seem worth
the hassle to change banks. But when that is multiplied over millions
of customers and transactions in an $18 trillion
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deposit market (think: _Superman III_ and _Office Space_
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those few bucks add up to billions of dollars of upward wealth
transfer from non-rich savers to bank executives.

The result: Even as banks refuse to pass on more of their interest
profits to depositors, “customers remain loyal to their primary bank
in high proportions,” as a J.D. Power executive told _Investopedia_
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Summarizing the situation, the chief economist at Raymond James said:
“It will take a very, very large increase in rates to make people
really change banks…People either don’t know or they are too lazy
to go and open up an account in a different bank.”

Giving Americans The Same Interest Rates That Banks Enjoy

Paying almost nothing to depositors while lending out their savings at
high interest rates is a dream come true for bankers. As a Deloitte
report
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put it: “Such economic calculus makes sense: why not grow interest
income while keeping interest expenses under control?”

For everyone else, though, this is a scam. Short of nationalizing the
banking system, what can be done about such a systemic rip off?
Plenty.

For one thing, you can go take a look at the interest rate — or APY
— on your own savings and checking accounts and compare it to the 5
percent interest rate
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that your bank now gets when it deposits your money at the Fed. If the
spread is preposterously large, you can start looking for better
treatment somewhere else. If you keep the amount under $250,000 or use
an insured cash sweep
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around (not necessary for most Americans, who don’t have a quarter
million dollars lying around), you can get the same government
guarantee of safety that the too-big-to-fail banks enjoy.

You can also explore moving your money into different financial
instruments (Treasury ladders
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money market mutual funds
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etc.) that could pay better interest rates — which more savers are
now doing. Indeed, in the last 16 months, almost
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of deposits have flowed out of commercial banks — and much of that
is probably savers searching for better yield.

Slowly, this capital flight is starting to exert at least some
pressure on bank CEOs to stop treating depositors’ savings as free
money that they don’t have to pay for. One too-big-to-fail bank,
Citi, is already feeling the squeeze
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to pass on more of its yields to savers. In its report on the
record-high spread between the federal funds rate and deposit interest
rates, the Fed predicts
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that more banks will follow the same path.

As _Axios_
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it after three big banks
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saw deposit outflows: “For the first time in a long time, banks are
going to compete to pay you more for your money.”

Good.

Beyond the righteous public shaming that Reed, the Rhode Island
senator, engaged in, lawmakers and regulators could also start
championing specific policies that would make a difference.

Donate To The Lever [[link removed]]
For example, regulators can ignore Treasury Secretary Janet Yellen’s
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push for more bank consolidation, and they can stop listening to
finance industry advocacy groups like the Bank Policy Institute, whose
lobbyist told _Politico_
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he wants government officials to declare that “midsize banks need to
be allowed to merge and be acquired potentially by larger banks.”
(Sidenote: the lobbyist’s quote appeared in a _Politico _newsletter
edition
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was literally “presented by the American Bankers Association,” yet
another bank lobby group).

Instead, regulators can start blocking bank mergers
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More consolidation [[link removed]]
reduces consumer-benefiting competition between banks to offer
lower-interest loans and higher-interest deposit payments.

Moreover, Malherbe asserts that central banks could make the special
interest rates they offer to commercial banks contingent on those
banks treating the public more fairly — something British regulators
are now considering
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“The solution is simple: Make interest payment on reserves
conditional on banks passing the higher rates to depositors,” he
writes, adding that “the central bank could set a maximum margin as
a condition.”

Even better would be measures helping individual depositors access the
same government-provided interest rates that commercial banks already
enjoy.

Right now, the Federal Reserve says
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it “provide(s) financial services to banks and governmental entities
only [and] individuals cannot, by law, have accounts.”

This means Americans get doubly screwed: While the Fed’s higher
interest rates jack up borrowers’ loan costs, savers cannot access
the high deposit interest rates that the Fed pays to banks.

That law, though, can change via the Roosevelt Institute’s proposal
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to create so-called FedAccounts, in which every American could open
their own Fed account that “would pay the same interest rate that
commercial banks receive on their balances.”

In effect, savers would be able access the government-guaranteed
interest rate that private banks right now exclusively enjoy, rather
than being bilked by private profit-skimming banks offering far lower
interest payments to the public.

There is also Hockett’s proposal
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expand the existing TreasuryDirect program
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accounts to buy savings bonds and T-bills. Hockett says that existing
law allows the Biden administration to use executive action to quickly
turn these into full-fledged bank accounts with digital wallets and
transaction capabilities.

“Banks’ profits derive from the ‘spread’ between low-interest
borrowings — that is, client deposits and higher-yield investments
(such as) Treasuries,” he recently wrote in _The Financial Times_.
“Thanks to cutting out the middlemen, these digital Treasury bank
accounts, provided they are held to maturity, would pay far more
interest than ordinary bank accounts do.”

Those middlemen, though, are among the most powerful forces in
Washington. For years, bank lobbyists have successfully
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even the most modest proposals for public banking options, and the
industry’s spending
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is designed to deter lawmakers from any serious reform efforts. No
doubt, any legislation designed to protect savers would prompt bank
CEOs to quickly funnel some of their skyrocketing net interest income
into a well-funded opposition campaign.

Those bankers understand the truism best summarized in the television
show _Mr. Robot_
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man a gun and he can rob a bank. Give a man a bank and he can rob the
world.”

But with such a huge gap between deposit and loan interest rates, the
question now is: How much robbery is the world willing to tolerate?

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* Banks; Economic Policy; Interest Rates;
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