What Benefits To Savers? Banks Rush To Hike Prime Rate To 3.50%, Forget To Increase Deposit Rate

Someone forgot to give the banks the memo that the Fed's first rate hike since 2006 was supposed to, at least on paper, benefit the savers of America and not so much the, well, banks.. Because the ink hadn't even dried on the Fed's statement and one after another banks revealed that they would promptly boost their Prime lending rate from the current benchmark of 3.25% to the new Fed Funds-implied prime rate of 3.50%.

As a reminder, while generically comparable to LIBOR, a bank's prime rate is the rate at which banks lend to their most creditworthy customers, clients and large corporations. But what makes the Prime hike most important is that it is used as the benchmark for other loans like credit card and small-business loans. In other words, banks wasted no time to serve their indebted customers with the cost of the Fed's rate hike. Banks such as:

  • Wells Fargo
  • US Bankcorp
  • JPMorgan
  • M&T
  • PNC
  • Citi

And soon every other bank.

As CNBC reported, "a change in the federal funds rate will have no impact on the interest rates on existing fixed-rate mortgage and other fixed-rate consumer loans, a Wells Fargo representative told CNBC. Existing home equity lines of credit, credit cards and other consumer loans with variable interest rates tied to the prime rate will be impacted if the prime rate rises, the person said."

The good news: the rates on mortgages, auto loans or college tuition aren't expected to jump anytime soon, according to AP, although in time those will rise as well unless the long-end of the curve flattens even more than the 25 bps increase on the short end.

What about the other end of the question: the interest banks pay on deposits? Well, no rush there:

"We won't automatically change deposit rates because they aren't tied directly to the prime," a JPMorgan Chase spokesperson told CNBC. "We'll continue to monitor the market to make sure we stay competitive."

Bottom line: for those who carry a balance on their credit cards, their interest payment is about to increase. Meanwhile, 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.