WASHINGTON, DC – It’s a simple fact: when the Federal Reserve raises its rates then banks increase the interest rates they pay savers.  With that history in mind, U.S. Senator Jack Reed (D-RI) has a simple question for the nation’s largest banks: If big banks are now charging customers much higher interest rates for a range of products, why are they still paying customers such puny rates for the money in their savings accounts? 

 

According to the Federal Deposit Insurance Corporation (FDIC), the average interest rate for a savings account is 0.21 percent.  And most of the big banks are still effectively paying just 0.01 percent interest to their depositors for savings.

 

Reed, a member of the Senate Banking Committee, says it’s unfair for big banks to charge hundreds, or in some cases thousands of dollars more in interest rates for things like credit card loans (up to 28 percent) and mortgages (7 percent), while consumers earn just pennies in interest – less than half of a half percent -- for the money in their savings accounts.

 

During a Senate Banking Committee hearing on large bank oversight, Senator Reed called out big banks for taking advantage of their own customers by charging more under the guise of higher interest rates while the banks themselves failed to pay out higher interest yields for savings accounts.

 

Higher interest rates, which are set by the Federal Reserve to help fight inflation, can raise costs for borrowers, but should also mean higher yields for savers.  This is due to the fact that savings accounts at a bank effectively allow the bank to borrow the depositor’s money, for which the institution pays the customer some form of interest in return.

 

During the September 22 hearing with big bank CEOs, Senator Reed stated: “Interest rates are going up, but deposit rates, which you pay for your deposits, are really stagnant — very, very low. It raises the question that [you’re] making substantial amounts of money on these increased interest rates, why are you not beginning to raise interest rates on deposits?”

 

Wells Fargo CEO Charles Scharf replied: “We are beginning to raise rates. We have products that have a range of alternatives, I think, up to a peak of 1.5 percent as of the other day. And as rates continue to rise, we would expect to continue to increase the rates that we pay our customers.”

 

Forty-two days later, Wells Fargo is able to charge mortgage rates of 7 percent, and higher rates for consumers to carry a credit card balance, yet the interest on savings accounts for Wells Fargo customers has barely budged.

 

Today, Senator Reed sent seven individual letters to Wells Fargo and six other major banks (JPMorgan Chase, Bank of America, Citigroup, U.S. Bancorp, Truist, and PNC), noting: “It appears the biggest banks are exploiting the higher interest rate environment to benefit their executives and shareholders, not the ordinary Americans whose deposits provide the funding necessary for those banks to operate.”

 

According to the FDIC, U.S. commercial banks held $16.8 trillion in deposits as of June, with much of that money deposited in individual checking and savings accounts.

 

Senator Reed wrote: “Earlier today, the Federal Reserve raised its interest rate target to 4%. With higher interest rates, Wells Fargo [or JPMorgan Chase, Bank of America, Citigroup, U.S. Bancorp, Truist, and PNC] has been able to make giant profits from lending to its customers.  Last quarter your bank collected more than $12 billion in interest from mortgages and other loans, up 36% from the year before.  This figure is net of the interest that Wells Fargo [or JPMorgan Chase, Bank of America, Citigroup, U.S. Bancorp, Truist, and PNC] paid to depositors.  You have recognized that the Federal Reserve’s actions offer your bank an opportunity to profit, telling investors on the most recent earnings call that you see “the positive impacts of rising interest rates driving strong net interest income growth” and that your bank “is positioned well as we will continue to benefit from higher rates.”

 

“Normally, one would expect savers also to be well-positioned to take advantage of higher interest rates.  But that does not seem to be the case for depositors at the biggest banks.  Wells Fargo [or JPMorgan Chase, Bank of America, Citigroup, U.S. Bancorp, Truist, and PNC] has benefited from higher interest rates by charging customers much more for mortgages, credit cards, and other loans, without paying customers higher rates on their deposits. One year ago, a new Wells Fargo [or JPMorgan Chase, Bank of America, Citigroup, U.S. Bancorp, Truist, and PNC] customer received 0.01% on an ordinary savings account, while paying 3.34% on a 30-year fixed-rate mortgage and 13% to 25% on a credit card.  Now, that same new customer would still receive 0.01% on a savings account, but pay 7.08% on a mortgage and 16% to 28% on a credit card.”

 

Reed concluded his letter by giving the banks three weeks to respond to the simple question: “please provide an explanation, by November 23, 2022, of why your bank still pays the same very low interest rates on deposits even as it makes giant profits by charging borrowers higher interest rates on loans.”

 

Text of the letter to Wells Fargo follows, and nearly identical letters to each bank may be found here:

 

November 2, 2022

 

Mr. Charles W. Scharf

Chief Executive Officer

Wells Fargo & Co.

420 Montgomery Street

San Francisco, CA 94104

 

Dear Mr. Scharf:

 

I write to inquire about the very low interest rates that Wells Fargo is paying its customers on their savings accounts.

 

Earlier today, the Federal Reserve raised its interest rate target to 4%. With higher interest rates, Wells Fargo has been able to make giant profits from lending to its customers. Last quarter your bank collected more than $12 billion in interest from mortgages and other loans, up 36% from the year before. This figure is net of the interest that Wells Fargo paid to depositors. You have recognized that the Federal Reserve’s actions offer your bank an opportunity to profit, telling investors on the most recent earnings call that you see “the positive impacts of rising interest rates driving strong net interest income growth” and that your bank “is positioned well as we will continue to benefit from higher rates.”

 

Normally, one would expect savers also to be well-positioned to take advantage of higher interest rates. But that does not seem to be the case for depositors at the biggest banks. Wells Fargo has benefited from higher interest rates by charging customers much more for mortgages, credit cards, and other loans, without paying customers higher rates on their deposits. One year ago, a new Wells Fargo customer received 0.01% on an ordinary savings account, while paying 3.34% on a 30-year fixed-rate mortgage and 13% to 25% on a credit card. Now, that same new customer would still receive 0.01% on a savings account, but pay 7.08% on a mortgage and 16% to 28% on a credit card.

 

In response to my questions at a Senate Banking Committee hearing in September 2022, you and the CEOs of the nation’s other largest banks all said that you expect to raise deposit rates as the Federal Reserve continues to raise interest rates. The banking industry’s own research has suggested that deposit rates would start rising once the Federal Reserve’s interest rate target reached 1.33%. The Federal Reserve’s target is approaching three times that level. Several other large banks do, in fact, offer savings accounts that pay their depositors 2.25% to 3.0%. And yet, deposit rates at your bank have not budged.

 

While average consumers have seen virtually no increase in deposit rates, your bank offers higher-yielding longer-term deposit products to well-off customers who can afford to lock up tens or hundreds of thousands of dollars for more than a year. But these deposit products are out of reach for many Americans who cannot afford them, and they are no substitute for savings accounts that give customers access to their money on demand to pay for rent or utilities.

 

Soaring interest rates are hitting Americans hard. Customers are paying more and more for loans. It appears the biggest banks are exploiting the higher interest rate environment to benefit their executives and shareholders, not the ordinary Americans whose deposits provide the funding necessary for those banks to operate. Savers would be better off if the biggest banks offered deposit rates that even modestly resembled the Federal Reserve’s target rate.

 

In light of these concerns, please provide an explanation, by November 23, 2022, of why your bank still pays the same very low interest rates on deposits even as it makes giant profits by charging borrowers higher interest rates on loans.

 

I appreciate your attention to this important matter.

 

Sincerely,

 

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