Banks begin to raise rates on CDS, deposits

U.S. banks are being forced to do something they haven’t done for 15 years: fight for deposits.

After years of earning next to nothing, depositors are discovering a trove of higher-yielding options like Treasury bills and money market funds as the Federal Reserve ratchets up benchmark interest rates. The shift has been so pronounced that commercial bank deposits fell last year for the first time since 1948 as net withdrawals hit $278 billion, according to Federal Deposit Insurance Corp. data.

To stem the outflows, banks are finally starting to lift their own rates from rock-bottom levels, particularly on certificates of deposit, or CDS. More than a dozen U.S. lenders including Capital One Financial are now offering an annual percentage yield of 5 percent on one-year CDS, a rate that would have unspeakably high two years ago. Even the big banks are feeling the heat. At Wells Fargo, 11-month CDS now pay 4 percent.

The very biggest banks can afford to slow-walk their rate increases, simply because they still have relatively high deposit levels. Overall, the average rate on a one-year CD is roughly

1.5 percent. That’s up from 0.25 percent a week before the Fed began raising rates a year ago, but still well below inflation. After a year of record profits, the foot-dragging has earned banks plenty of ire from politicians.

Nevertheless, banks are feeling more pressure to boost rates, which will raise funding costs and crimp profit margins. According to Barclays, the median large-cap bank can expect growth in net interest income, a measure of lending profits, to slow to 11 percent this year, from 22 percent last year.