We’ve written about the large US banks’ accumulation of securities – mostly Treasury bonds and mortgage-backed agency debt – that began just before the start of the Covid pandemic. More recently, we looked at the $250 billion of unrealised losses on these portfolios as interest rates rebounded.

Behind all this is a story of deposits, in particular $1.8 trillion of ‘noninterest-bearing’ deposits at the top four banks that pay zero interest, according to the Risky Finance banking tool. (There are $4.2 trillion of them in the US banking system as a whole, according to the Federal Reserve). That’s $1.8 trillion deposited by customers who receive zero when they could be receiving as much as 5% at current levels of interest, or $90 billion per year.

How zero-interest deposits bail out banks The existence of bank accounts paying zero interest is nothing new, but they play a vital role for US banking giants that accumulated large, low-yielding securities portfolios that are now underwater as a result of rising interest rates. Legacy securities lower the interest income on the asset side, but zero-interest deposits offset this. As zero-interest deposits fall, this becomes harder to sustain. Click on the buttons above the chart to change the metric. Data source:

Their customers’ acceptance of this is the secret behind banks’ ability to maintain underwater securities portfolios. This is because shareholders expect banks to earn significantly more on their assets than they pay out on their liabilities, to cushion shareholders from actual, realised losses. Let’s consider Bank of America which has $670 billion of securities with $125 billion of unrealised losses, according to its most recent filings.