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 The Fed, which has long telegraphed its intention to end its
seven-year experiment with zero rates, may start raising rates as
soon as Thursday.
Whenever it does, banks can begin charging more for many loans,
while they will not be in a rush to pay much more for deposits.
With the Fed having slashed interest rates and injected trillions of
dollars into the economy since the financial crisis, banks have far
more deposits than they consider necessary and are fine if some
disappointed savers take their money elsewhere. Lenders are usually
slow to lift the deposit rates, but because they are awash in money
from depositors, they can take it particularly slow this time
around.
Charging more on loans without paying much more for deposits will
help the bottom line at most banks. Analysts at Morgan Stanley said
37 of 44 U.S. banks they cover expect to earn more if interest rates
go up. For example, Bank of America Corp estimated that a 1
percentage point rise in short-term interest rates would bring it an
extra $2.4 billion in pre-tax profits in the following year.
Citigroup Inc put the annual windfall at $1.9 billion.
The boon for banks at the expense of depositors underscores how the
Fed's recent policies have created winners and losers. Record-low
lending rates and some $3.6 trillion in cash injections from the Fed
have helped a wave of corporate mergers and leveraged buyouts,
stemmed the mortgage crisis and boosted stock markets. But the loose
monetary policy also squeezed savers, particularly pensioners who
rely on bonds and bank accounts for their income.
"It has effectively been a massive wealth transfer from retirees and
others savers into the pockets of indebted Americans," said Greg
McBride, a financial analyst at bankrate.com.
Banks have profited from being the middlemen in that transfer and
now it may still be quite a stretch before savers can feel any
relief.
"Savers have been short-changed by low rates," said banking analyst
David Hendler of Viola Risk Advisors.
Bank executives say depositors tend to think about switching to
other banks or alternative low-risk investments once they see
someone offering one extra percentage point in interest income. That
time could be more than a year off, given that the Fed has not even
taken its first step and many traders expect it to hold off until
next month or December.
MORE COMPETITION, JUST NOT NOW
The good news is that when that time comes, competition for
depositors could heat up quickly because of new capital rules
adopted since the financial crisis, which force banks to rely more
than before on funding from deposits by individuals.
Technological changes since the last 2004-2006 tightening cycle,
including the rise of mobile banking apps, also make it easier for
savers to compare rates and move money faster from one account to
another.
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In that last cycle, banks raised deposit rates by 0.46 percent of
the 4.25 percentage points that the Fed lifted its rate. This time
they could pass on closer to 0.49 percent of the Fed’s eventual
increase, according to an estimate by Novantas, which advises banks
on deposits.
Bank executives say it is difficult to work out when savers might
start thinking about taking their money elsewhere, but believe time,
for now, is on their side.
Low inflation, falling global commodity prices and moderate economic
growth suggest that any Fed tightening cycle is likely to be very
measured and slow. Most investors expect at most one or two
quarter-point rate hikes between now and July 2016, according to the
CME Group's FedWatch tracking rate expectations in the futures
market.
With the Fed having kept rates near zero since late 2008, rates on
many short-term investments, such as money market funds have been
close to nothing, and banks have also been flooded with cash that
had nowhere else to go. Today deposits exceed loans outstanding by
40 percent compared with about 9 percent at the start of the last
tightening cycle in 2004, a cushion approaching $75 billion that
banks might whittle down before starting to worry how to fund loans
on their books.
For consumers, rates on deposits remain pitifully low. On average,
banks have offered less than 0.25 percent of annual interest on
six-month certificates of deposits since August 2011, according to
data compiled by BankRate.com. The rate was down to 0.17 percent
earlier this month, compared with 3.63 percent in April 2007 when
the Federal Reserve’s benchmark rate was at its last peak of 5.25
percent.
The last time the Federal Reserve began raising rates, in June 2004,
it was 90 days before banks paid consumers higher rates for their
basic savings accounts, said Dan Geller, who tracks the outlook for
deposits at Analyticom.
It took 10 months for banks to pay even 0.2 percentage points more
on so-called money market deposit accounts and by then the Fed’s
rate was up 1.75 percentage points.
“It will probably be much longer” this time before banks pay more
Geller said, given how high deposit levels are.
(Reporting by David Henry; Editing by Dan Wilchins and Tomasz
Janowski)
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