The earnings season reveals the dilemma of the US banking industry: With a 0.01% interest rate, American depositors are fleeing in droves

If you deposit $100, you can earn $0.01 in interest per year. Would you be interested?

However, this is not a dream, this is the daily operation of Morgan Stanley.

It is understood that for users who deposit $5 or $500,000 in Morgan Stanley's Sapphire, Premier Plus, or Private Client checking accounts, the annual interest rate they receive is a negligible 0.01%.

The situation is the same for savings accounts, no matter how much money is deposited, the interest received is still very low. Even for customers with "relationship rates," they can only get a slightly better rate - 0.02%.

In this scenario, customer deposits are mainly for safety and liquidity considerations, rather than for high interest income.

However, Americans are slowly getting tired of the 0.01% interest rate, which is driving them to look for other investment options with higher returns.

To attract and retain deposits, Wall Street banks have had to raise deposit rates and pay more interest. This pressure offsets the benefits they gain from rising loan rates, leading to a decline in their main source of income - net interest income.

Morgan Stanley's Net Interest Income Declines, Stock Price Plunges 6%

The U.S. banking industry initially benefited from the rapid pace of rate hikes, as they could issue higher-rate loans, thereby increasing loan income. At the same time, they were slow to act in raising interest rates for depositors, leading to a surge in net interest income last year.

However, on April 13, Morgan Stanley reported that its first-quarter net interest income (the difference between loan income and interest paid to depositors) declined compared to the fourth quarter of 2023, marking the first sequential decline in 11 quarters. This news caused Morgan Stanley's stock price to plunge 6% on the same day, the largest single-day drop since June 2020.

Moreover, Wells Fargo's net interest income also fell short of expectations. Both banks stated that the pressure to raise deposit rates has offset the benefits of rising loan rates.

Customers Abandon "Low-Interest Accounts" for Higher-Rate Large Time Deposits

Faced with meager interest, one of Americans' choices is to abandon low-interest accounts and opt for higher-rate large time deposits.

Federal Reserve data shows that as of the end of 2023, U.S. commercial banks held $2.26 trillion in large time deposits of $100,000 or more, an increase of $615 billion from the same period last year, marking the largest annual increase on record.

Additionally, Wells Fargo stated last week that its interest-free deposits decreased by 18% from a year ago, while interest-bearing deposits increased.

These trends highlight consumers' preference for higher-rate deposit products, as large time deposits (CDs) typically offer higher rates than regular checking or savings accounts due to their lock-in period.

Jeremy Barnum, Chief Financial Officer of Morgan Stanley, stated during the Q1 earnings call: "The shift from checking and savings accounts to large time deposits is a major trend." Against the backdrop of a policy interest rate of around 5%, if the interest rates on checks and savings accounts are close to zero, investors have to transfer to high-yield large certificates of deposit in order to achieve higher returns."

He added that the company is committed to adjusting its services to attract and retain funds seeking higher returns. Currently, banks have to raise deposit rates in order to attract and retain deposits.

Customers are turning to higher-yield money market funds, the stock market, and other financial products

For Americans, another option is to completely bypass banks and choose other investment channels, such as money market funds, the stock market, or other financial products, in search of higher returns.

According to data from the Investment Company Institute, inflows into money market funds in 2023 surged by over $1 trillion, marking the largest increase ever. These funds offer a yield of around 5% and do not have the lock-up terms associated with time deposits, making them increasingly popular alternatives to deposits.

As consumers easily transfer deposits to financial products offering higher interest rates through smartphones, banks are forced to compete on rates. While this pressure is relatively small for large banks like JP Morgan and Bank of America, it could bring pressure to regional lending institutions.

Fintech companies also pose a threat to banks, attracting consumer deposits by offering savings rates more than 10 times higher than the national average. LendingClub Corp. and Betterment offer high-yield savings accounts of up to 5%, while SoFi Technologies Inc. offers rates around 4.6%.

Moreover, the Fed's rate policy is also driving this trend. With the Fed maintaining high rates for a longer period, depositors will have more time to seek higher-yield investment options. With the two-year Treasury yield exceeding 5% this week, banks may have to raise time deposit rates again