Posted by on March 16, 2017 3:41 pm
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Categories: bank Banking Business Economy Excess Reserves Federal funds Federal funds rate Federal Reserve System Finance Interest rates LIBOR Monetary Policy money US Federal Reserve

One of Janet Yellen’s stated reasons behind the Fed’s rate hike has been to reward savers with a slightly higher rate of interest on their deposits: after all, for nearly a decade the interest collected by depositors across US banks, with a few exceptions, has been 0.0% or thereabout. Unfortunately, as noted yesterday, even with the Fed Funds rate now the highest it has been in a decade at 0.75%-1.00%, that does not mean that any bank will be hard pressed to compete for America’s savings – with some $2.1 trillion in excess reserves still out there, and with many banks shutting down “unprofitable” accounts, quite the contrary – and as such, the unspoken message in yesterday’s rate hike is that savers are, once again, screwed.

However, while most banks are in no rush to pay savers and depositors more, or anything for that matter, they wasted no time in piggybacking on the Fed’s rate hike by boosting their own Prime Rate, the interest that banks charge their most credit-worthy customers. To be sure, the vast majority of borrowers pay vastly higher interest rates, but Prime – like Libor – serves as the floating benchmark for many, if not most now that Libor is defunct, outstanding secured and unsecured loans, including credit cards and mortgages.

It is those borrowers who may be interested to know that as overnight, virtually every bank has now increased its Prime rate from 3.75% (where it was after the December rate hike) to 4.00%, oh and they have no obligations to notify debtors of the increase

Among the banks who have announced an increase in their Prime rate are the following:

And while savers are once again getting the shaft, and major beneficiary of yesterday’s Fed rate hike will be… the banks again. Recall that the Fed pays lenders Interest on Excess Reserves, or IOER, which as of today is 1.00%. And since currently there is $2.13 trillion in outstanding bank excess reserves (a number which fluctuates depending on whether banks are using other Fed liquidity conduits at any given moment), it means that as of today, the Fed will pay banks $21.3 billion in interest on reserves every year (assuming the Fed does not hike more), an increase of just over $5 billion from the $16 billion in annualized interest banks were received from the Fed until yesterday.

Indeed it pays to be a bank. In fact, it does so twice.

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