How Smaller Banks’ Rising Deposit Costs Could Affect Your Bank Account

Ridofranz / iStock.com

Commitment to Our Readers

GOBankingRates' editorial team is committed to bringing you unbiased reviews and information. We use data-driven methodologies to evaluate financial products and services - our reviews and ratings are not influenced by advertisers. You can read more about our editorial guidelines and our products and services review methodology.

20 Years
Helping You Live Richer

Reviewed
by Experts

Trusted by
Millions of Readers

Earnings week is coming for banks in August, and the results might be abysmal. With rising deposit costs, a slowdown in loans, and poor-performing assets, banks are hurting right now.

While large banks might be able to withstand the headwinds of high interest rates and costs to run their bank, smaller banks might not fare so well. And this could have an effect on your bank account, so pay attention. Here’s how we ended up here, and what to look for going forward.

Smaller Banks Are Struggling

Small and mid-sized regional banks have been hit hard by the Fed’s quick rate hikes over the past year. With multiple bank failures this year in the sector, smaller banks are under the microscope by both regulators and customers.

While there haven’t been any large bank failures since First Republic Bank collapsed in May 2023, smaller banks are still feeling the pressure of high interest rates. Banks having been competing for deposits this year, but the cost of deposits has steadily increased, with some savings accounts paying over 5% APY.

These high deposit costs are hurting the bank’s bottom line, causing profits to shrink to keep up with the increase in interest payouts to depositors. The net interest margin (difference between loan and deposit interest rates) is shrinking at many banks, making it hard to turn a profit with the deposits they have been given.

Coupled with the fact that many regional banks are sitting on low-paying assets, such as bonds and long-term U.S. Treasuries paying low rates, they will need to find other profit centers.

Big Banks Can Weather the Storm

Smaller banks might be struggling to handle the high deposit costs, but large national banks have more opportunity to handle the headwinds of high interest rates. With strong branding and a wider range of offerings, large national banks have more profit centers available, including credit cards, loan products and investment banking.

Big banks get away with paying less for deposit accounts, while charging monthly fees for accounts to maintain a higher profit margin than their regional competitors. And their branding also allows them to charge more for loans as well, keeping their net interest margin higher than competing banks.

Overall, big banks will weather the storm of high deposit costs, and with excellent marketing and a much larger footprint than regional banks, they are poised to do well — even during times of economic turmoil.

Your Bank Might Lower Interest Rates on Accounts

With smaller banks struggling to turn a profit on your deposits, they may have to resort to finding ways to make up the difference. Since account interest rates can be changed at any time, you should keep an eye on your interest rates.

Banks make money on your deposits in several ways:

• Investing in assets like U.S. Treasuries and mortgage-backed securities
• Auto loans and home loans
• Commercial business and real estate loans

If the interest collected on loans isn’t much more than the interest being paid out to depositors, smaller banks may be forced to lower deposit interest rates to stay afloat.

In addition, regulators are now requiring banks with $100 billion in assets (or more) to hold more capital on hand. This means more funds that cannot be used to make a bank profit, further exacerbating the problem.

Loans Could Get More Expensive

In addition to the possibility of lower interest rates on deposit accounts, banks could resort to increasing the interest rates on loans to make up the difference. This means that auto loans and home loans might end up costing you more.

The other possibility is that regional banks may be forced to pursue riskier loans to bring in extra income, but this could put the bank at risk if the loans are defaulted on. If a bank becomes unable to repay the interest owed on accounts, then they could be seized by the FDIC.

Regional Bank Profits Will Continue To Suffer, Which Could Cost You More

The Fed just raised the Fed Funds Rate another 25 basis points, and hinted at another raise in rates before the year is over. This will continue to squeeze profits from regional banks and put the pressure on to find other sources of income.

But banks won’t just roll over and lose money — they will find a way to make a profit, especially if they have shareholders. This could mean lower interest rates on your deposit accounts, or higher rates on loans. 

Remember, you are in control of where you bank, and if you find that your regional bank isn’t competing with other firms, you can always choose to move your money elsewhere.

Share This Article: