As we're all well aware by now, once Trump was elected on November 8th the Fed suddenly decided it was no longer necessary to prop up asset prices in the United States with artificially low interest rates. As such, they've embarked on their first rate-hiking spree since the last one ended just over a decade ago.
Meanwhile, in light of the fact that the Fed has raised rates by 75bps over the past 6 months, we recently wondered aloud just how long the big banks could continue to stiff Americans out of interest payments on their deposits. As the Wall Street Journal points out today, despite three Fed rate hikes over the past several months, the average rate paid on deposits at the 16 largest banks in the U.S. has risen a paltry 10 bps.
Meanwhile, with nearly $12 trillion held in deposit accounts at U.S. commercial banks, each 25bps of foregone interest is costing depositors about $30 billion a year, all of which is flowing straight to the bottom line of the large banks.
In the end, we concluded that the banks would continue to suppress deposit rates for as long as their customers continued to ignore the fact that they were getting shafted but that, over the long haul, math and greed would prevail and depositors would demand higher rates.
Alas, it seems as though the "long haul" that we predicted has arrived well ahead of schedule...at least for business customers anyway. As the Wall Street Journal points out today, corporate customers are starting to demand higher rates on deposits and, for the most part, the large banks are acquiescing.
Consumers are giving banks a pass when it comes to shopping for higher interest rates on deposit accounts. Businesses, on the other hand, are becoming more demanding.
With short-term interest rates on the rise, corporate depositors are seeking bigger payouts for their deposits, and big banks have started capitulating.
The reason: Small rate increases are often worth just pennies to many consumers, but they can translate into meaningful dollars on large corporate deposits of millions or even billions of dollars.
And companies have greater leverage with banks since in many cases they also bring in lucrative investment banking and trading business.
“The jig is up,” said James Gilligan, assistant treasurer at Kansas City, Mo.-based power company Great Plains Energy Inc. He said many companies, including his, have negotiated better deposit pricing with banks where they also borrow. Treasurers who have the flexibility to move their money are also seeking out higher rates.
Of course, the reality is that banking institutions offer fairly commoditized products with minimal differentiation and barriers to switching, aside from the pure hassle, are not that extensive. So while banking executives may tout their position of power in negotiating to keep deposit rates lower for longer, in the end they'll be forced to take whatever rate the market demands...
“The way we approach pricing these days is, we defend our turf,” says Tayfun Tuzun, chief financial officer at Fifth Third Bancorp , the Cincinnati-based bank. Mr. Tuzun said U.S. banks are also being pressured by competition from overseas banks that want to build their deposits. Some are willing to pay 1.25% or 1.3%, he said, while a typical corporate deposit rate for a large account in the U.S. currently is about 0.9% to 1%.
More corporate customers say that day is now passing. “A year ago, it was not worth the time it takes to make a phone call” and push for a higher rate, said Jeff Glenzer, vice president at the Association for Financial Professionals, an industry group for corporate treasurers. “The higher the rate becomes, the more attractive it is to worry about where the money sits.”
Most banks are already awash in more deposits than they need, causing some analysts to predict they’ll be stingy on corporate deposit rates, especially with loan growth softening in recent months.
“We’ll use pricing to start relationships,” said Darren King, CFO of M&T Bank Corp. , based in Buffalo, N.Y. “But over time, relationships need to work for both us and the customer.”
And, then again, maybe Yellen will completely cave on rate hikes if equity markets ever decide to decline for more than 30 minutes at a time and this whole discussion will be moot.