U.S. banks captured roughly $485B a year by paying customers with savings accounts far less than the Federal Reserve paid them, according to a 17-year analysis of Federal Reserve and FDIC data by Alan Percal of Compare Personal Finance.
At the August 2023 peak, the Fed Funds rate stood at 5.33% while the FDIC's average savings rate was just 0.43%, a 4.90 percentage point gap that was the widest on record and more than double the prior modern high. Across four complete rate cycles, the study found banks passed through no more than 7% of any Fed hike to savings accounts, and consistently kept at least 93% of every move.
Quick History: When the Federal Reserve raises rates, banks earn more interest on the money they park at the Fed. In theory, banks then compete for customer deposits by raising the interest they pay on savings accounts, passing some of the windfall along to account holders. The share that actually reaches savers is called “deposit beta.” Economists have long assumed banks pass through about half of any Fed rate change to depositors over time. However, the report found that the real number is nowhere close for regular savings accounts.
During the 2022-23 cycle, which was the most aggressive Fed tightening in 40 years, the Fed raised rates by 525 basis points (5.25 percentage points), while the average FDIC savings rate crept from 0.06% to just 0.43%. Banks captured 93% of the move. In the prior 2015-19 cycle, it was even worse, with banks keeping 98% of the hike, and the average savings rate moving a grand total of four basis points (0.04%) over several years.
The report also found that the lag between adjusting rates has been extremely one-sided.
After the Fed's December 2015 hike, the average savings rate did not budge for 26 months, while rate cuts reached customers within weeks. The analysis estimates the average American household left about $3,300 in interest on the table during the most recent cycle by holding cash in standard accounts rather than high-yield ones.
Robinhood was particularly awful about bringing rate drops to customers, oftentimes doing so in what felt like hours. After rates dropped, I remember getting marketing e-mails from them promoting how “Robinhood is making it cheaper to trade on margin,” and like clockwork, I'd get an e-mail the next day about how my high-yield savings account rate was dropping, and this was blamed on the Fed rate drop. Basically they took credit for it becoming cheaper to borrow money, and blamed the Fed for paying out less to savings accounts. The marketing spin pissed me off every time.
To be fair, banks are under no obligation to pass ANY Fed rate hikes to their customers, so it's not that they did anything illegal — just greedy and unethical — and I felt it was important for my readers to know. I've long argued that the U.S. needs more competition in the banking sector and advocated for issuing additional bank charters, and studies like this exemplify why.
