Report: Banks Took in $1 Trillion From High Interest Rates

American banks banked $1 trillion thanks to a recent stretch of high interest rates.

That’s according to a report Sunday (Sept. 22) by the Financial Times (FT), which cited its own analysis of Federal Deposit Insurance Corp. (FDIC) data.

That analysis found that banks got higher yields for their deposits with the Federal Reserve while keeping rates low for many savers, helping beef up their profit margins.

Rates on some savings accounts increased in keeping with the Fed’s target of more than 5%, the bulk of U.S. depositors, particularly customers of banking giants like J.P. Morgan Chase and Bank of America, received much less.

Midway through the year, the average American lender was paying depositors interest at the annual rate of just 2.2%, the report said. That’s above the 0.2% banks were paying out two years ago but much lower than the Fed’s 5.5% overnight rate that the banks themselves can get, the FT report said.

These lower payments helped banks make $1.1 trillion in excess interest, accounting for roughly half of the total dollars banks brought in during that period, according to the FT analysis. The report noted this is in contrast to Europe, which has — in some countries — placed windfall taxes on banks which benefited from steeper interest rates.

In the wake of the Fed’s rate cut, banks will “certainly” have “the ability to reduce deposit costs,” Chris McGratty, head of U.S. bank research at KBW, told the FT. 

“The degree of aggressiveness will, I think, vary bank to bank,” added McGratty.

Following the Fed’s rate cut last week, three banks — BMO, Truist and M&T — announced they would reduce their prime lending rate from 8.5% to 8%, PYMNTS reported.

The rate cut was the first since the COVID pandemic, was larger than usual, and is expected to usher in a steady easing of monetary policy. 

America’s Credit Unions Deputy Chief Economist Curt Long said last week that the cut was larger than the Federal Open Market Committee had previously projected and that its forecast suggested another 50 basis points of rate cuts during this calendar year and a full percentage point reduction next year.

“The FOMC cut rates more aggressively than it had previously forecast, an acknowledgment that inflation is subsiding and risks to the labor market are rising,” Long said in a statement provided to PYMNTS.