Banks have begun to raise their own rates on deposits from record-low levels, a welcome news for consumers and businesses, but a costly turn of events for the industry.
As the Federal Reserve increases benchmark interest rates, depositors are finding higher yield Treasury bills and money market funds after years of limited earnings. Commercial bank deposits fell in 2022 for the first time since 1948. Net withdrawals reached $278 billion, according to the Federal Deposit Insurance Corp (FDIC).
Many U.S. lenders are now offering an annual percentage yield of 5% on certificates of deposit maturing in about a year. As a result, banks could face a drop-off in lending and more write-downs, Barclays Plc Analyst Jason Goldberg told Yahoo Finance. Losing deposits poses higher profit risks for smaller and regional banks.
“There are challenges ahead for banks,” Goldberg said. “Banks reflect the economy they operate in, and most forecasts call for slowing GDP growth and increasing unemployment.”
Large banks can increase rates slowly because their deposit levels are still relatively large. But they’re feeling pressure to raise them, Yahoo Finance reports, which will increase funding costs and nip profit margins. Growth in net interest income for the average large-cap bank will slow to 11% in 2023 from twice that in 2022, according to Barclays.
“Banks are competing for the capital, money, now. We’ve never had rates go up this fast,” JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said on the bank’s January earnings call.
Certificates of deposits, which offer the highest rates, are popular among consumers. For banks, unlike checking or savings accounts, CDs lock up funding for a set amount of time. As CD rates have risen, so have their sales, totaling $1.7 trillion in the fourth quarter, up from $1.49 trillion in the third. The jump is the largest quarterly increase in at least 20 years, according to S&P.
In the fed funds market, where banks lend to one another for short time periods, rates have spiked to the highest level since 2007, and trading volume has hit a seven-year record.