Official Data shows that Businesses are Handing Billions Extra to their Banks

The daily updates in the media about the path of interest rates for next year are unhelpful. Whereas the markets are predicting a decline in 2024 there is much disagreement amongst policy makers about how soon the declines will happen.

What is clear is that there are different economic and political factors in play in different markets. Sluggish economic growth in declining inflation are dominating.

In the US there is a sense that rates were held too low and for too long and policymakers wont move as fast as the market expects. In the UK and Europe the political environment is different but the noises from policy makers are similar.

Universally banks are not paying fair interest rates on bank funds but have been quick to hike interest rates for borrowings. The difference (net interest margin) is increasing bank profitability to record levels.

Official data shows that businesses are incurring ever increasing losses to the banking industry.

According to the most recent data from the FDIC (Federal Deposit Insurance Corporation) the net interest margin of the US banks increased in Q3 2023 from the prior quarter to 3.3%. This reflects the huge interest margin loss for US businesses from their banking arrangements.

JP Morgan Chase, Bank of America, Citigroup and Wells Fargo where net interest income climbed, all announced bumper results for 2023. The largest US banks have been the biggest beneficiaries from the rise in interest rates and the lower confidence of the safety of cash in smaller banks.

Businesses have been significant contributors to bank profits in 2023. Their operating cash generates the lowest yields but is of highest value to the banks. Most businesses continue to have sub-optimised legacy banking arrangements. This is largely as a result of inertia and a lack of awareness of more appropriate banking products available in the market.

The UK is no different. Headline rates from the Bank of England (November 2023 statistics private non-financial corporations) actually showed a decrease in the effective rate for sight deposits of 0.04% to 2.56% and an increase in the effective rate for time deposits of 0.05% to 4.64%.

The Eurozone banks appear to offer poorer returns to businesses.  According to the ECB data published in January 2024 the composite interest rate for overnight deposits from corporations was 0.83%. The composite interest rate for new deposits with agreed maturity from corporations was unchanged at 3.71%.

Interestingly, according to the latest statistical release from the Central Bank of Ireland (December 2023) interest rates on non-financial corporation overnight deposits were unchanged at 0.11%. Interest rates on new non-financial corporation deposits with agreed maturity fell to 3.7%.

It is imperative that businesses across the globe review their banking arrangements to ensure they are fit for purpose and to stem the losses to the banking industry.

Brian Weakliam

Founder & CEO Bankhawk

Sources: 

FDIC (Federal Deposit Insurance Corporation)/ press release/ Q3 2023

Bank of England /  Statistics / Published on 04 January 2024

ECB / statistical release/ bank interest rates/ Published on 5 January 2024

Central Bank of Ireland / Statistical Release/ 10 January 2024

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