Banks are reportedly lowering the interest rates they pay on corporate deposits faster than they pay on consumer deposits.
These cuts follow the Federal Reserve’s September cut in benchmark lending rates, the first such reduction in four years, the Financial Times (FT) reported on Sunday (October 20).
Since 2022, when the Fed raised interest rates to a 23-year high, banks have responded to demands from corporate customers to raise deposit rates in tandem with those changes, the report said.
The pace of reduction is now accelerating, as these increases benefit business customers more than consumers, the report said. Some of the cuts were made in advance of the Fed’s rate cut, and many more were made after the Fed’s announcement.
Banks are doing so to protect their profit margins after the Fed’s rate cuts, but they are cutting interest rates because demand for loans remains weak and they don’t need deposits to fund new loans, according to the report. It is said that it is possible.
The Fed is expected to continue lowering its benchmark lending rate, with policymakers following the 50-basis-point cut to reduce interest rates from about 5% to about 3% by 2026, according to the report. states that it is possible.
The Federal Reserve’s interest rate cut and subsequent cut in banks’ prime lending rates will have a significant impact on corporate finance executives, PYMNTS reported on September 24.
For example, companies that hold large amounts of cash may experience lower yields on safe short-term investments such as money market funds, Treasury bills, and savings accounts. This means chief financial officers and treasurers need to carefully consider how to optimize liquidity while managing risk.
The Fed’s rate cuts will also affect the ability of smaller banks, such as community banks and credit unions, to capture a share of corporate capital and royalties, PYMNTS reported on September 23.
Because the cost of debt is trending lower and interest rates paid on cash held in money markets, CDs, and “traditional” savings accounts are decreasing, the “spread” that companies can earn on their funds is decreasing. , for example, increases if you hold funds in a high-yield account. Therefore it is pinched.
Smaller corporate accounts may gravitate towards smaller, more local financial institutions.
