Congressional lawmakers criticized US bankers this week for not raising interest rates on savings accounts held by ordinary consumers despite a series of big increases in the federal funds rate by the Federal Reserve.
Increased interest rates by the Federal Reserve makes it more expensive to borrow money from each other for banks and other financial institutions, and in theory this expands the purchasing power of the dollar and lowers inflation.
But higher interest rates make it more profitable to lend money to banks, and increased revenue can pass on to consumers in the form of higher interest rates on primary savings and money market accounts.
On Wednesday, the Federal Reserve raised interest rates for the third time in a row by three-quarters of a point to bring the federal funds rate to 3.25 percent, the highest level since 2008. The Fed’s forecast showed rates could reach 4.6 percent in 2023. .
But the national average interest rate on savings accounts is 0.13 percent, according to Bankrat’s September 14 weekly survey of financial institutions. The Federal Deposit Insurance Corporation set that figure at 0.17 percent, with money market accounts returns at 0.18 percent and checking accounts return at 0.04 percent.
“One of the only silver linings in an environment of high interest rates is that savers are supposed to be rewarded for their savings,” Dale Michael San Nicholas (D-Guam) said during a House Financial Services Committee hearing on Wednesday. The committee heard testimony from the presidents of JP Morgan Chase, Wells Fargo and Bank of America, among other major US banks. “They’re supposed to see the interest they earn on savings accounts go up.”
“However, what we have here is the federal funds rate which is currently … 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 in the case of risk-free funds being put into the Federal Reserve, they make between 2.45 percent and 2.49 percent on the deposits of their clients.
Senator Jack Reed (DRI) made the same point Thursday at a meeting of the Senate Banking Committee.
“I will cut to the chase. Interest rates are going up, but deposit rates, which you pay for your deposits, are really stagnant — very, very low. The question arises that [since you’re] Reap large sums of these increased interest rates, why not start raising interest rates on deposits? ” He said.
In a statement to The Hill, Reed said banks should start paying more to their customers.
“I would like to see the major banks offer rates on deposits that are more in line with the fed funds rate,” he said. “People with fixed incomes especially rely on their savings, and they’ve taken the short end of the stick from the big banks in terms of low rates of return.”
Bankers in both houses have pledged to begin raising deposit rates as the Fed funds rate continues to rise.
But paying less interest while attracting more high federal interest rates is one way the big banks are making money. This difference is known in industry jargon as a “spread,” and has previously been touted by banks in earnings calls with investors.
“Retail banking revenue was up 6 percent, primarily driven by margins and deposit volumes,” Mark Mason, Citigroup’s chief financial officer, said in July on the company’s second-quarter earnings call, as reported by financial media firm The Motley Fool.
Charles Scharf, president of Wells Fargo, told the Senate Banking Committee that his company had “begin to raise rates.” During an earnings call in July, he said that “on the retail and consumer side, core rates haven’t changed much for the big banks.”
Critics of the banking industry say banks like the current environment of high interest rates because it allows them to get more money from their customers.
Carter Dougherty, spokesman for the American Progressive Lobby for Financial Reform, in an email to The Hill. “They can earn higher interest rates on loans while paying less on deposits.”
Dougherty said the lack of competition within the financial industry is what allows banks to take more money from their customers without boring customers and funnel their money to a competitor or out of the banking system altogether.
The underlying problem is the lack of competitiveness in the banking sector, which we measure by looking at consistently high profit margins. Basic consumer banking is not full of continuous innovation that reduces costs to banks or customers and increases their profit margins; The business still takes deposits and makes loans. The other problem is that it’s hard to walk away from your bank.”
Citigroup made a profit of $4.5 billion in the second quarter of 2022 on revenue of $19.6 billion, with a 23 percent margin. Wells Fargo had a margin of 18 percent in the second quarter, and JPMorgan Chase had a margin of 28 percent. These are much higher margins than what many industries regularly see.
Lawmakers have also noted that banks are getting bigger than the pandemic, and Democrats have called for consolidation in the form of financial mergers and acquisitions as a threat to consumers.
“Over the past several years, we have seen the banking system in this country undergo a drastic transformation. House Financial Services Committee Chair Maxine Waters (D-Calif.), said the largest banks in our country are bigger than ever during the pandemic.
“Regulators have been stamping out these merger applications for a very long time, and it is time to get to know the people who are actually benefiting from these mergers,” she said.
Republicans cautioned bankers in both chambers against pursuing environmental and social equality goals through targeted investment or compliance practices.
“Banks are currently at a critical crossroads,” Senator Pat Tomey (R-Pen) told bank CEOs on Thursday. “Accept the role that some liberals prefer, which is to have your institutions carry out social policy on behalf of the state, or to embrace your history as drivers and promoters of free enterprise and to get away from highly charged social and political issues. I strongly suggest that you choose the latter path, and I suggest that if you do not, you risk being Both parties will treat you in the future as public utilities.”
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