Last month’s bank runs caused a surge in deposits to larger US banks, but the downside of higher interest rates is now affecting their profitability.

Americans are trying on various sizes when they deposit money in banks. Depositors rushed into the largest banks during the bank runs of last month, and these institutions are now learning the downside of higher interest rates: lower profitability.

Can I pique your interest in a loan?

Post-2008 PTSD drove Jamie Dimon to organize an industry-wide campaign to preserve First Republic Bank from the contagion. He seemed preoccupied with minor issues. JPMorgan reported its first quarterly earnings of the year on Friday, with profits of $12.6 billion, considerably exceeding analyst projections and up more than 50% from the previous year. Citigroup and Wells Fargo reported $4.6 billion and $5 billion in profits on the same day.

And while the small bank exodus was a significant factor in the first quarter’s surprise great performance, Jerome Powell might be the recipient of gift baskets from large banks this week. Banks can now charge clients more for loans thanks to the Fed’s rate hikes, even though their rates to depositors are rising at a considerably slower rate. However, Americans’ reintroduction to real interest rates and competition from below may be beginning to alter that calculation:

  • While the Federal interest rate is currently between 4.75% and 5%, JPMorgan continues to pay only 1.85% on interest-bearing deposits, compared to payments of 1.22% from Wells Fargo and 2.72% from Citigroup (all of which represent small but noticeable increases from the end of last year).
  • Regional banks are paying out far better in an effort to retain consumers. According to recent Wall Street Journal reporting, PacWest Bancorp, situated in Los Angeles, provides up to 5.5% for shorter-term CDs, but Merchants Bank of Indiana gives an introductory return of approximately 5.4%. Later this month, the majority of small banks will report earnings.

Over the Hedge

Although big banks may gain from the ripple effects of Silicon Valley Bank’s collapse, they are also bringing greater focus to a more shady sector of the financial services sector: hedge funds, which have doubled in size globally since 2009. Following the turmoil in the bond market last month, the sector’s propensity for speculative investing, according to SEC chief Gary Gensler, poses a larger danger of financial instability.

“We just had Treasury yields move more significantly than they had in 35 years in three days in mid-March,” Gensler said to the FT. As a capital markets regulator, it is appropriate to inquire about the situation and determine whether the risk… spreads.

Bank Runs and Interest Rates
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