Your Bank May Soon Start Paying You More Money

After years of low interest rates, banks may finally start paying consumers more for their deposits.

Jan 7, 2014 at 7:30AM

Are you tired of your bank paying you virtually nothing on your deposits? Well, there may be hope that could change.

Piggy Bank
Source: Flickr/401(k) 2013.

In a speech last Friday, Philadelphia Federal Reserve President Charles Plosser noted that the Federal Reserve -- which aims to control short-term interest rates via the Federal Funds rate -- might have to become "aggressive" in its efforts to push interest rates higher after historic lows. Banks use the Federal Funds rate as the baseline for what they will in turn pay out on their deposits.

For the past five years, the Federal Funds has been below 0.5% in an effort to stimulate the economy and spur growth. 

Images
Source: St. Louis Federal Reserve.

While low interest rates are beneficial for people who borrow money -- like the countless people who refinanced their mortgage or bought a new home -- it often comes at the expense of people who have a lot of money in savings, as the interest rate their banks pay them has dwindled.

Consider the interest rates the following banks paid on their deposits in back in 2006:

Bank

9/30/2006

9/30/2013

Bank of America (NYSE:BAC)

2.84%

0.15%

Citigroup (NYSE:C)

3.81%

0.80%

JPMorgan Chase (NYSE:JPM)

3.93%

0.25%

Wells Fargo (NYSE:WFC)

3.44%

0.17%

Average

3.51%

0.34%

Source: Company SEC filings.

It's important to note those rates above include checking, savings, CDs, and other accounts, but it nonetheless demonstrates how much lower the interest rates are now versus seven years ago. That difference of roughly 3% means $30 over the course of a year that isn't paid to customers for every $1,000 they have in savings.

Plosser

Charles Plosser.

While the low rates are beneficial to the banks because they get to pay out less money -- consider that in the third quarter of 2006, Bank of America paid out $2.9 billion on its $409 billion in deposits, versus just $246 million on its $657 billion in deposits in the third quarter of 2013 -- it also means banks have to charge less on their loans. This hurts their net interest margin, which is a key driver of income for the banks, so they too would like to see rates rise.

All in all, with the U.S. economy moving along the road to recovery after years of tepid growth following the recession, both savers and banks alike are likely hoping Plosser's guidance will ring true this new year, and that rates finally move upwards from their historic lows.

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Fool contributor Patrick Morris owns shares of Bank of America. The Motley Fool recommends Bank of America and Wells Fargo. The Motley Fool owns shares of Bank of America, Citigroup, 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.

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