The Federal Reserve's near-zero interest rate policy was designed to spur the economy out of the doldrums of the Great Recession. One unintended consequence though is that it's protecting profit margins at the nation's largest retail banks -- notably at Bank of America (NYSE:BAC), Wells Fargo (NYSE:WFC), and JPMorgan Chase (NYSE:JPM) -- while crushing returns for savers.

The mechanics of what's happening
Retail banks make money by collecting deposits and then using that cash to make loans. The bank charges a greater interest rate on the loans than it pays on the deposits, and the result is the rough equivalent of gross margins (banks, being complicated, call it "net interest margins").

In the third quarter, Wells Fargo reported its net interest margin at 3.38%. That represents $10.7 billion dollars. Bank of America didn't fare as well, reporting $10.5 billion of net interest income on a margin of 2.44%. JPMorgan reported $10.7 billion.

Combined, these banks made $31.9 billion from collecting deposits and making loans. They were able to do this in the lowest interest rate environment in memory. And yet, despite the low rates, the net interest margins at banks are actually increasing. 

And increasingly steadily:


What's driving the increase? Simply put, money that historically would have been paid to bank depositors, i.e., savers, is now simply staying put on these corporate balance sheets.

Since total interest income peaked in the fourth quarter of 2007, this revenue stream has declined by 37.5% industry-wide. This makes perfect sense as interest rates declined as a result of Fed policies. 

Total interest expense, though -- that is, money paid to depositors -- declined over 86% during the same time period!

Assuming for a moment what could have been, if total interest expense would have declined the same 37.5% as total interest income, an additional $47 billion would be distributed to depositors every quarter. 

That's $47 billion every quarter to consumers and businesses across the country. But that's not the current reality. The reality is that this money stays with the banks -- the same banks who brought on the financial crisis in the first place.

The takeaway
The Federal Reserve is administered by economists, academics, and policy makers much smarter than me. My argument here is not necessarily for or against a near-zero interest rate policy, quantitative easing, or any of the other responses to the financial crisis. But as an observer, this is the reality.  

If you have cash in a savings account, you're losing money. Inflation is currently quite low, but interest paid on CDs and savings is even lower. Every day that your cash sits in those accounts is another day for inflation to eat away at the real value of your money.

Rates, being essentially zero, really have nowhere to go but up. When that happens, we should fully expect the blue and red lines in the chart above to move upwards. The question for bank shareholders and depositors is which line will move up faster.

If the Federal Reserves policies and actions have shown us anything over the past five years, it's that policymakers favor strengthening the banks more than the savers. In my view, I'd anticipate the banks further gaining the upper hand as rates rise.

Don't be surprised if bank net interest margins continue the march on the chart from the lower left to the upper right. That's great news for Bank of America, but unfortunate for your savings account.

Fool contributor Jay Jenkins has no position in any stocks mentioned. The Motley Fool recommends Bank of America and Wells Fargo. The Motley Fool owns shares of Bank of America, JPMorgan Chase, and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.