Banks Cut Interest Rates Paid on Corporate Deposits

Banks are reportedly cutting the interest rates they pay on corporate deposits faster than those they pay on consumer deposits.

These cuts followed the Federal Reserve’s lowering of benchmark lending rates in September, which was the first such reduction in four years, the Financial Times (FT) reported Sunday (Oct. 20).

Since 2022, when the Fed was raising those rates to the highest levels in 23 years, banks met corporate clients’ demands to raise their deposit rates in tandem with those changes, according to the report.

Because corporate clients benefited more than consumers from those increases, they’re now seeing faster cuts, the report said. Some of the reductions preceded the Fed’s cut, and more followed its announcement.

Banks are doing so to protect their profit margins after the Fed’s rate cut, and they can lower those rates because they don’t need deposits to fund new lending, as the demand for loans remains weak, per the report.

The Fed is expected to continue lowering its benchmark lending rates, with policymakers saying that the 50 basis point cut could be followed by more that would reduce the rates from about 5% to about 3% by 2026, according to the report.

The Fed’s rate cut and banks’ subsequent reductions in their prime lending rate have significant implications for corporate finance executives, PYMNTS reported Sept. 24.

For example, companies with significant cash reserves may see reduced yields on safe, short-term investments like money market funds, Treasury bills or savings accounts, meaning chief financial officers and treasurers need to carefully consider how to optimize liquidity while managing risk.

The Fed’s rate cut also affects whether smaller banks like community banks and credit unions can capture share of the corporates’ dollars and loyalty, PYMNTS reported Sept. 23.

With the cost of debt trending lower and the rates paid on cash held in money market, CD and “traditional” savings accounts falling, the “spread” that corporates earn on that carry — say, if they had funds in high-yield accounts — is therefore pinched.

It could be the case that smaller corporate accounts could gravitate toward smaller, more locally rooted financial institutions.