Last week, JP Morgan, the largest bank in America, boasted a staggering 67% increase in quarterly profits, amounting to $14.5 billion on revenue of just $41 billion. Such a remarkable net profit rate of 35% outshines even tech giants like Google or Apple, which managed 21% and 25% respectively. Wells Fargo and Bank of America also reported significant jumps in earnings, contributing to a combined $30 billion in profits generated by the country’s four mega banks in the quarter.
This financial success might raise eyebrows, especially among regular Americans who recall the trillions of dollars allocated in pre-bailouts through unlimited FDIC guarantees and the BT FP lending against inflated asset prices. Additionally, sweetheart deals on acquisitions, like JP Morgan’s $50 billion taxpayer-funded purchase of First Republic, which has already yielded them $2.7 billion in pure profit, add to the concerns.
However, the situation is vastly different for community banks. Still reeling from the effects of the March crisis, they are down 30% and face further worries with a projected 23% drop in profits, according to the Wall Street Journal. This could trigger more positive flight, leading to a severe decline in smaller banks’ viability.
The key to the mega banks’ profitability lies in the Federal Reserve’s rate hikes. They manage to retain depositors and attract those fleeing community banks due to offering higher interest rates on deposits. For instance, JP Morgan currently advertises a mere 0.01% interest on checking accounts for the average American bank account, which translates to roughly 53 cents in annual interest. However, they can then lend that same money at an 8.25% interest rate, which is 825 times more than what they pay to depositors. This stark difference enables them to reap substantial profits.
Conversely, community banks find themselves in a challenging position. They must pay depositors higher interest rates to retain them. For example, the Journal highlighted a Midwest bank that increased payments to depositors by six times, and yet another Montana bank faced a 7% loss in deposits despite paying seven times more than the previous year. As a result, community banks are now paying approximately 100 times more in interest than the minimal rates the larger banks get away with.
This discrepancy is already taking its toll, as the number of banks in America has halved since the 2008 crisis. This further cements the dominance of the too-big-to-fail oligopoly, which is not only bigger but also politically protected. This concentration is likely to escalate, leaving many communities without local banks, a vital resource for making local investments. Instead, a centralized system will favor mega corporations and foreign lending, potentially draining capital from regions often overlooked by Wall Street. The future of America’s financial landscape is at stake, and we must keep a close eye on these developments. As the mega banks thrive, community banks struggle, and the disparity continues to widen, we risk losing the essence of hometown banking, leaving behind a system that primarily benefits a select few.
