Banks’ Low Interest Rates Costing Them Deposits

The country’s four largest banks reported a combined 5 percent drop in U.S. deposits that earned no interest in the third quarter, compared with a year ago. According to The Wall Street Journal (WSJ), JPMorgan Chase, Bank of America, Wells Fargo and Citigroup revealed that customers withdrew more than $30 billion from U.S. bank accounts that don’t earn interest over the year that ended June 30, the first such annual decline in more than a decade.

These deposits, which mostly comprise business and consumer checking accounts, are valuable because banks can use them to make loans. The WSJ pointed out that as short-term interest rate rise, the deposits become even more lucrative.

However, while lenders have been able to increase their earnings through higher rates on loans, thanks to short-term rate hikes, they haven’t been sharing any of the wealth with depositors. Now, after eight Fed increases, some customers are moving their money to higher yield investments.

These no-interest deposits are “the crown jewel of the bank funding base,” said Allen Tischler, a senior vice president at Moody’s Investors Service. “You start losing that and you end up not being able to benefit from future rate increases.”

With that in mind, in June, it was reported that some lenders are offering new customers perks of one-time payments of hundreds of dollars if they open a new account. Though some banks have been doing this for years, the practice is growing and becoming more common. In fact, the WSJ found — over the past six months ending in March — that the number of banks that sent more than 5 million of the mail offers, rewarding new account holders with cash, has jumped 15 percent since the middle of 2015.

Meanwhile, the average bonus for regional lenders has increased to close to $300 from under $200 during the same time frame, with JPMorgan Chase, Wells Fargo, and SunTrust Banks offering bonuses that are between $150 and $500.