Moments after the Fed announced it would hike rates for the first time in 9 years on December 16, the ink on Yellen's statement was not yet dry and one after another bank announced it would hike its respective Prime rate - the benchmark rate on everything from small business loans to credit card monthly fees - from 3.25% to 3.50%.
Yet while banks scrambled to increase how much they collect courtesy of the Fed's rate hike, none showed any interest in boosting the interest they pay on deposits, a rate which currenly averages below 0.1% across the US financial system.
As the WSJ put it two weeks after us [13], "hours after the Fed’s decision earlier this month, the largest U.S. banks announced increases in the prime rate, a reference rate for a variety of loans including credit-card debt. But most banks didn’t make any corresponding hikes to the interest they pay to depositors. The moves signaled that at least for now most banks hoped to pocket the gains from the Fed’s move."
And this is what we said two weeks ago [14], "those who have savings at US banks, please don't hold your breath to see any increase on the meager interest said deposits earn: after all banks are still flooded with about $2.5 trillion in excess reserves, which means that the last thing banks care about is being competitive when attracting deposits."
We were wrong: some should certainly have held their breath, because as the WSJ reports today [13], "some bank customers won’t have to wait much longer to reap benefits from the Federal Reserve’s decision to raise interest rates."
Case in point: J.P. Morgan, which will begin raising deposit rates for some of its "biggest clients" in January. "Biggest" clients, of course, is a universal euphemism for "wealthiest."
The WSJ adds that J.P. Morgan’s deposit-rate increase will affect most institutional clients and the size of the increases will vary, the person said. They will apply to “operating” deposits, which are deemed stickier and less likely to be withdrawn in a crisis.
Operating deposits are more attractive to banks than so-called excess or “nonoperational” deposits, which are considered riskier. New regulations require that banks hold bigger capital cushions for deposits considered riskier such as noninsured balances held by hedge funds.
Another word for nonoperational deposits are "those held by 99% of the population", or those who actually would benefit from an increase in the deposit rate.
Banks in the U.S. have moved aggressively in the past two years to reduce those nonoperational deposits. State Street Corp. earlier this year took the unusual step of charging some clients for large deposits and J.P. Morgan cut that type of deposit by more than $150 billion in 2015.
The decision to pay its wealthiest clients is a first, or as the WSJ calls it, "an early mover among its American rivals."
Representatives for Bank of America Corp. , Wells Fargo & Co. and Citigroup Inc. said there has been no change to deposit rates at the banks. A representative for Goldman Sachs Group Inc. had no immediate comment, while one for Morgan Stanley declined to comment.
However, now that a first-mover has emerged, expect every other bank to follow suit, since as much as they don't need deposits now, they are well aware that when (if) the Fed drains the $2.6 trillion in excess reserves and banks have to rely on deposit funding once more, those banks which lost the most clients with "operating" deposits will be severely disadvantaged.
Unfortunately, for all those who have less than a few hundred thousand parked in a deposit account collecting nothing (and at a constant risk of "bail-in") and are thus considered "nonoperational" accounts by the management teams of banks bailed out by taxpayers just a few years ago, you can continue holding your breath for a long time until the trickle-down generosity of Janet Yellen bathes you in the most immaterial of deposit rate hikes.
