The Federal Reserve has raised rates four times since 2015. The market expects a fifth post-crisis increase in the Fed's target rate on Wednesday, which would bring the fed target to a range of 1.25% to 1.5%.
Even as interest rates trudge higher, most savers aren't seeing the benefit on their checking or savings accounts. That's because many banks have all the deposits they need -- and then some -- eliminating the need for banks to compete with higher interest rates on their deposit accounts every time the Fed votes for an interest-rate increase.
Here's why banks don't need to raise interest rates on deposit accounts
Interest rates are nothing more than the price of money. The price of anything, including bank deposits, is governed by the basic law of supply and demand.
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One way to measure the balance of supply and demand for deposits is to divide the banking industry's loans and leases by the industry's collective deposits. When the loan-to-deposit ratio is high, banks are most likely to compete for deposits by offering higher rates. When the ratio is low, banks are less likely to compete for deposits with higher rates.
Going into the 2008 financial crisis, banks were expanding their loan portfolios quickly. To finance their rapid growth, banks had to entice depositors with higher interest rates. Following the financial crisis, however, deposits have come in faster than banks can lend them out, resulting in less competition for deposits. The following chart shows the loan-to-deposit ratio for all commercial banks in the United States, based on Federal Reserve data.
Source: Author, data from the Federal Reserve.
Of course, some institutions will always need more deposits even when the industry as a whole is awash in customer cash. Synchrony Financial and Ally Financial frequently advertise some of the highest interest rates for savings accounts. Not surprisingly, both reported relatively high loan-to-deposit ratios of approximately 131% in their most recent quarterly earnings reports.
These banks are hungry for deposits because alternative sources of financing are much more expensive. For example, Synchrony Financial currently pays about 1.6% per year on its average deposit, whereas its average non-deposit liabilities cost it about 2.8% per year. Therefore, Synchrony Financial is both willing and able to pay far more for deposits than the average bank because even relatively high-cost deposits are cheaper than non-deposit funding.
If you want to gauge the likelihood your bank will pay you a higher rate of interest when Federal Reserve increases interest rates, refer to the bank's loan-to-deposit ratio as an indicator. You can find loan and deposit data for publicly traded commercial banks on any financial portal, whereas information for smaller, non-public institutions can be found by searching for call reports in regulatory databases.
