{"id":1085745,"date":"2023-06-14T09:04:59","date_gmt":"2023-06-14T09:04:59","guid":{"rendered":"https:\/\/jacobin.com\/2023\/06\/big-banks-federal-reserve-interest-rates-depositor-yield-net-interest-income\/"},"modified":"2023-06-14T09:10:59","modified_gmt":"2023-06-14T09:10:59","slug":"banks-are-using-high-interest-rates-to-rip-off-depositors","status":"publish","type":"post","link":"https:\/\/radiofree.asia\/2023\/06\/14\/banks-are-using-high-interest-rates-to-rip-off-depositors\/","title":{"rendered":"Banks Are Using High Interest Rates to Rip Off Depositors"},"content":{"rendered":"\n \n\n\n\n

The spread between loan interest rates and deposit rates is at a record high, allowing big banks to make out like bandits while consumers miss out on hundreds of billions of dollars in potential savings.<\/h3>\n\n\n
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\n The JPMorgan Chase logo is seen at its headquarters building on May 26, 2023 in New York City. (Michael M. Santiago \/ Getty Images)\n <\/figcaption> \n<\/figure>\n\n\n\n\n \n

It is easier to rob by setting up a bank than by holding up a bank clerk.<\/em><\/p>\n

-Bertolt Brecht<\/em><\/p><\/blockquote>\n

The last time you checked your bank statement, did you take a moment to look at the fine print that shows the interest rate you are being paid on your deposits? If you did, you may have noticed that it still seems pretty negligible, even though you\u2019ve seen so many headlines about the Federal Reserve hiking the interest rates that banks charge for loans.<\/p>\n

This is the Great Bank Robbery of 2023 \u2014 the yawning gap between what you are paid on your deposits and what banks are earning from other institutions when they loan out your money. It\u2019s a caper that has quietly become a systemic upward transfer of wealth thrumming beneath the macroeconomy \u2014 but as you\u2019ll see below, the theft can be stopped.<\/p>\n

This particular heist is predicated on an asymmetry: Banks collect depositors\u2019 money and pay them very little interest, while using depositors\u2019 money to earn a lot more interest when the Federal Reserve raises lending rates. Banks can earn those higher yields by making high-interest loans to borrowers. They can also take advantage of the Fed\u2019s own interest rates for interbank lending<\/a> or for simply parking their excess reserves at the central bank<\/a> \u2014 and those rates are not available to the general public.<\/p>\n

This spread isn\u2019t new \u2014 the basic business of a bank is to collect deposits, pay depositors\u2019 some interest, and then make loans at higher interest rates, with the difference used to pay for bank services (tellers, ATM machines, etc.) and generate a fair profit from such \u201cnet interest income.\u201d<\/p>\n

The larceny here is in the size of the gap between what banks are paying savers and what banks can earn through the Federal Reserve.<\/p>\n

That spread is now \u201cat a modern high,\u201d according to a recent Fed report<\/a>.<\/p>\n

\"\"<\/p>\n

In an $18 trillion deposit market, that means savers are missing out on hundreds of billions of dollars that are being skimmed off their nest eggs and funneled to bankers and their shareholders. It means bank statements showing almost no interest payments on your deposits, while<\/a> a<\/a> series<\/a> of<\/a> recent<\/a> earnings<\/a> reports<\/a> show banks reaping ever-higher profits from net interest income.<\/p>\n

\u201cThe banks are getting free money from depositors to make loans and investments with, but savers aren\u2019t getting any share of the gains,\u201d former Federal Reserve counsel and current Cornell University professor Robert Hockett told us.<\/p>\n\n \n\n \n \n \n

\u201cExploiting the Higher Interest Rate Environment\u201d<\/h2>\n \n

Federal Reserve chairman Jay Powell has said his interest rate hikes aim to \u201cget wages down<\/a>\u201d \u2014 and that has started to happen<\/a>. But typically<\/a> the other effect of such hikes is a boost in bank profits.<\/p>\n

\u201cWhen interest rates rise, profitability in the banking sector increases,\u201d Investopedia<\/em> explains<\/a>. \u201cBanks make money by accepting cash deposits from their customers in return for interest payments and then investing that money elsewhere. The bank\u2019s profit is the difference between the interest they pay their depositors and the yield they make through investing. Higher interest rates increase the yield on their investments.\u201d<\/p>\n

The current moment is an extreme example of this axiom: big banks are reaping outsize payouts from net interest income<\/a> because the spread between depositor payment rates and interest rates has become so enormous.<\/p>\n