No wonder they’re cautious. Interest rates have risen at their fastest pace on record as the U.S. Federal Reserve has gone all out to tackle inflation, which is now slowing but sits higher than the central bank’s. Even a 25-basis point shift can have significant effects on a $1 trillion loan book like Bank of America’s, as well as on enormous securities holdings.
Even then, the link between benchmark interest rates and the rate banks actually charge is getting harder to forecast. One reason is that non-bank lenders, from private equity firms to credit funds, have proliferated since official borrowing rates were last this high, in 2007.
Customers, who make up the other side of the interest equation, are equally enigmatic. Their deposits soared during Covid-19, and their spending came down. Bank of America boss Brian Moynihan said that depositors who used to have roughly $3,500 with the bank now have almost four times more. The figure is falling, but not evenly. The richest clients, Moynihan says, already have moved much of their wealth to more lucrative investments.
Most are trying to offer extra services to stop customers going elsewhere, or at least to be less demanding about what they get paid on their savings. An example is Bank of America’s artificial-intelligence financial assistant, Erica. But the free money feast will surely end. At PNC, deposits that pay no interest account for 29% of total customer balances. Before Covid-19 struck, they were 25%. There’s no reason they couldn’t end up lower, as they were before the 2008 financial crisis.