A recent analysis by the United Kingdom’s Financial Times claiming that two and a half years of Federal Reserve rate hikes produced a “windfall” for U.S. banks is misleading and falls short of what readers expect from the newspaper, American Bankers Association Chief Economist Sayee Srinivasan wrote in a letter to the editor. (Subscription required.)
Banks’ core business is taking in deposits that are subject to changes in short-term interest rates and then lending to consumers and businesses at terms that are customized to serve their funding needs, Srinivasan said. However, depositors have a variety of investment vehicles, and they do not exclusively choose banks for high rates.
“For example, investors can buy Treasuries at rates closer to the federal funds rate, but this may require them to lock their funds in without the flexibility of withdrawal upon demand,” Srinivasan said. “Banks provide security, convenience and accessibility of deposits, and depositors who value these elements over the rate make their decisions accordingly.
“Ultimately, using the loaded language of ‘windfalls’ obscures the choices businesses, consumers and banks make in a market environment,” he added. “For example, during the Covid-19 pandemic and the two-year period of zero interest rate policy, the FT’s flawed methodology reveals that depositors received approximately $56 billion in ‘excess’ interest on savings.
“We didn’t see the FT reporting on that ‘windfall’ for consumers because it would have painted an inaccurate picture. The same is true here,” Srinivasan said.
