By Avery Weisel
ABA DataBank
In its recent article, “Fed’s High-Rates Era Handed $1tn Windfall to US Banks” (subscription required), the Financial Times suggested that U.S. banks profited excessively from the elevated federal funds rates over a 2.5-year period (Q1 of 2022 through Q2 of 2024) by paying depositors lower returns while reaping higher yields on their assets. The analysis implies that this discrepancy resulted in an extraordinary financial gain for banks. However, this characterization of bank profits as a “windfall” reflects a fundamental lack of understanding of both the banking business model and the complex interplay of consumer behavior and market forces. If one applied the FT’s flawed methodology to the period when policy rates were close to zero during the pandemic, bank depositors would have enjoyed a “windfall” gain of close to $60 billion. As ABA noted in a recent letter to the FT editor, a balanced perspective on rate policy considers the competitive and strategic nature of banking operations, the diverse needs of depositors and the broader economic context.
The core business of banking
Banks’ core function involves accepting deposits and providing loans, with terms that balance customer needs and market conditions. Interest rates are a critical factor influencing this balance, but they are not the sole determinant of bank profitability. Banks’ earnings during a rising rate period depend significantly on their sensitivity to assets (such as loans) versus liabilities (such as deposits). This distinction is crucial, as not all banks benefit equally from rate changes. The FT’s analysis, which assumes a uniform effect across the banking sector, fails to account for these differences in bank strategy and consumer behavior.
Figure 1. Net interest margin has not skyrocketed during the “windfall” period (2022Q1-2024Q2)
Source: FDIC and Federal Reserve Bank of New York.
Contrary to the FT’s implication that banks uniformly suppress deposit rates, the market for deposits is highly competitive. If banks did indeed gain a windfall over the past few years, it would be reflected by a sustained spike in net interest margin, which, as shown in Figure 1, did not occur.
Figure 2. Net interest margin varies greatly among banks depending on a variety of factors, including asset size
Source: FDIC.
Larger banks, which experienced an influx of deposits during the flight-to-safety period in early 2023, did not need to aggressively raise rates to retain customers. Figure 2 shows that the net interest margin at the largest banks has always been well below the average and experienced downward pressure during the time of the so-called “windfall.” Meanwhile, smaller and midsize banks increased deposit rates significantly (as shown in the Figure by the decreases in net interest margin beginning in 2022) to prevent deposit outflows. This competitive behavior illustrates the varied and dynamic responses across the banking sector, challenging the notion that all banks uniformly offered low rates, leaving depositors without choices.
Consumer choices and the realities of banking
Depositors, both consumers and businesses, have various investment options, and rates of return may not always be the deciding factor. While alternatives like money market funds or Treasurys may offer better yields, these often come with constraints such as minimum balances and reduced liquidity. Banks, by contrast, provide convenience, liquidity, and services like debit cards, online banking, and secure access to funds — benefits that many depositors prioritize over marginally higher returns. Business deposits are often held for operational needs rather than to earn interest, and the FT overlooks this distinction by lumping all deposits together in its analysis, failing to consider their different purposes.
Inappropriate benchmarking with the fed funds rate
The federal funds rate is designed for short-term interbank lending, not for setting consumer deposit rates. The FT’s approach assumes all deposits should mirror the overnight rate, ignoring that banks balance short-term and long-term funding needs, which are influenced by the entire yield curve. With recent experience, where the yield curve is inverted for more than two years — meaning short-term rates exceed long-term rates — this comparison becomes even more flawed. The inversion creates a situation where banks pay more for deposits (which tend to be short-term in nature) than they can earn on loans (which tend to be longer-term), making it misleading to compare deposit rates directly with the short-term fed funds rate.
Ultimately, using the loaded language of “windfalls” obscures the choices businesses, consumers and banks make in a market environment. If we applied the FT’s logic consistently, periods of low interest rates — such as during the zero-interest-rate policy from 2020Q1 to 2021Q4 — would imply that depositors received an unjustified windfall due to excess interest savings. By this reasoning, the $56 billion in additional interest earned by depositors during that time would also be considered an unearned gain — but that would paint an inaccurate picture of what happened, just as the FT story about the period of rising rates paints an inaccurate picture. We hope the FT does better the next time.
For additional research and analysis from ABA’s Office of the Chief Economist, please see the OCE website.
Avery Weisel is senior director for banking and economic research policy at ABA.
