Stay informed with free updates
Simply register at American banks myFT Digest – delivered straight to your inbox.
U.S. banks are considering slashing interest payments for business depositors, aiming to protect profit margins after the Federal Reserve cut key lending rates.
Since 2022, lenders have been offering better rates to savers. Fed They raised benchmark interest rates to their highest level in 23 years and sought to ensure customers did not move money to another bank or money market funds.
Investment bank customers have been among the biggest beneficiaries, demanding and receiving payments on their deposits that have risen in step with the Fed’s benchmark rates.
After the first interest rate cut in more than four years last month, some banks identified business accounts as most prone to changes in savings rates.
“Corporate rates are moving (downward) faster than expected and faster than consumer deposit rates,” said Scott Hildenbrand, chief balance sheet strategist at Piper Sandler.
The 50 basis point reduction decided by the Fed should be the first in a series of reductions. Policymakers have indicated in their projections that rates could eventually rise down from around 5 percent to around 3 percent by 2026.
“You can get the price (of deposits) down faster, say in your company’s accounts, because they were demanding every penny of it going up,” Bruce Van Saun, managing director of Rhode Island-based regional lender Citizens Financial, which has approximately $175 billion in capital. deposits, told the Financial Times.
Tim Spence, CEO of Cincinnati, Ohio-based Fifth Third Bank, told the FT that “business clients have benefited the most from the rate rise, and so it makes perfect sense that their rates are falling.”
This view was echoed by Michael Santomassimo, chief financial officer of Wells Fargo, the third largest bank in the United States by deposits.
“We’re seeing exactly what we thought we were seeing on the most interest-rate-sensitive deposits,” Santomassimo said during a Wells third-quarter earnings presentation last week. “On the commercial side, as rates have started to fall, the betas are exactly what we thought and are quite high for these deposits. So it works.
Deposit betas measure how much of the interest rate policy change banks pass on to their customers.
Weak demand for loans hurt interest income. But it has given banks more flexibility when it comes to reducing what they pay to depositors, because they don’t need the deposits immediately to fund new loans.
“We’re still very early in the cycle, but you’ve certainly started to see banks act a little bit before that Fed taper in mid-September and certainly additional action after the Fed taper,” Jason Goldberg said , research analyst at Barclays. “We are, I would say, in the early innings of this downward beta cycle.”
Bank deposits are their main source of financing. The pressure to increase savings rates to retain customers has been particularly strong for mid-sized and small lenders in the United States. Large institutions such as JPMorgan Chase and Bank of America have benefited from their perceived security and national branch networks.
About 32 percent of JPMorgan’s $1.9 billion in U.S. deposits earn no interest, while Citizens pays no interest on about a fifth of its deposits, resulting in a larger, cheaper funding pool for JPMorgan.
Van Saun said citizens took a “very, very scientific” approach to measuring how best to price deposits to ensure they stay with the bank.
“We have all kinds of behavioral patterns in all the different deposit products that we offer,” he said. “Basically, you’re trying to predict what rates customers need to feel good about leaving their money in the bank, but you’re not paying much more than that.”