Is it true that 'banks are making money because interest rates are rising'? From deposits to investments, what is happening behind the scenes.
1. From a simple question
If interest rates rise, the difference between lending rates and deposit rates, the so-called interest margin, widens. Therefore, banks should be making money.
I think many people believe this, and I once thought so too.
However, when you read the ‘Monitoring and Analysis Report on Deposit-Taking Financial Institutions’ published by the Financial Services Agency at the end of July 2026, it becomes clear that it is not that simple.
And in the background, there is a change in our individual behavior.
I decided to write this article after seeing a certain article.
2. A story from when I was a bank employee
Let me talk about myself for a moment.
From 2019 to 2020, I worked in retail sales at a regional bank. At that time, the policy interest rate was around 0.1% from the negative range. Deposit interest rates were almost zero.
In any case, it was an era where deposits were not being collected.
Amidst that, interest in asset management was gradually increasing. So, we used the entry point of ‘being interested in investment’ to get people to open accounts and deposit funds.
Talking about investment was a means to collect deposits.
That was such an era.
How is it now?
I have opportunities to work with banks from the perspective of an asset management company, and I feel a sense that there is a tendency to focus more on deposits than on assets under management. This is because with the rise in interest rates, deposits themselves have become viable as products.
The same bank is facing the opposite direction due to changes in the interest rate environment.
This change serves as a guideline for interpreting this report.
3. Deposits are becoming harder to collect
I will organize the structure pointed out by the report.
The interest margin improves due to rising interest rates. However, that is based on the premise that ‘deposits are collected stably’.
This premise is beginning to waver at many banks. The growth of total deposit balances is slowing down.
There are two flows of funds in the background.
The first is the movement within personal financial assets.
While household financial assets themselves are expanding statistically, looking at the breakdown, a shift from deposits to stocks and investment trusts is being confirmed.
Although there is no direct mention in the report, it is safe to assume that the impact of investment promotion measures such as NISA, which the Financial Services Agency itself has been spearheading, is quite significant.
In addition, there are changes within deposits as well. This is a shift from ‘demand deposits’ such as ordinary deposits to time deposits with higher interest rates. For banks, this means an increase in funding costs.
The second is the movement of funds between banks.
Internet banks are increasing personal deposits by leveraging deposit interest rates and convenience. Recent deposit balances have expanded to the 50 trillion yen scale.
From regions to urban areas, and to digital channels. A structure where deposits flow out is becoming established.
What I want to focus on here is the difference in balance sheets by business type.
Looking at the data published in the Financial Services Agency report, as of the end of March 2025, deposits account for 80.9% of liabilities at regional banks. For credit unions and credit cooperatives, it is 92.0%.
On the other hand, for major banks, it is 62.7%. Funding methods such as corporate deposits and market procurement are diversified.
In other words, the higher the dependence on deposits, the more directly regional financial institutions are structured to be affected by deposit outflows.
4. And the issue of valuation losses
Another challenge is the valuation loss on securities.
During the long era of low interest rates, many financial institutions expanded their investment targets to foreign bonds, investment trusts, and corporate bonds to secure profits. This is because they could not survive on lending alone.
However, if interest rates rise, bond prices fall.
As a result, as of the end of March 2026, 51 regional banks and 359 cooperative financial institutions are holding valuation losses on their total securities holdings.
Here, too, differences based on scale are emerging.
While major banks and others are seeing an expansion in valuation losses on domestic bonds, valuation gains on their equity holdings are offsetting this. They have also been advancing efforts to curb interest rate risk, such as shortening the duration (average remaining maturity) of their bonds.
On the other hand, regional financial institutions have limited capacity for such measures.
5. The story of ‘reclassification to held-to-maturity’
While reading this report, this was the part that caught my attention the most.
It points out that in some regional financial institutions, a trend of reclassifying holdings to ‘held-to-maturity bonds’ to avoid realizing valuation losses has been confirmed.
If classified as held-to-maturity, there is no need to reflect valuation losses in the financial statements. On paper, the losses become invisible.
However, there is a price to pay.
It becomes impossible to sell or change positions flexibly. In other words, you lose the freedom of investment management. When interest rates move further, you will have no means to respond. This also leads to the loss of medium- to long-term profit opportunities.
The Financial Services Agency also points out the need for a framework where management sets a limit on acceptable losses and systematically processes valuation losses, rather than deferring them.
At this point, one thing occurred to me.
Isn’t the structure of this exactly the same as an individual investor holding onto a stock with unrealized losses?
I don’t want to realize the loss. So I won’t sell. I’ll pretend I didn’t see it.
And the moment you decide not to move, the next set of options is also lost.
It feels a bit strange to think that financial institutions, which should be completely different in scale and expertise, are falling into the same psychological structure as individual investors.
At the same time, this is also an important implication.
‘Just because the pros are doing it doesn’t mean it’s right.’
Even financial professionals can misread interest rates. When faced with losses, they want to defer them. As human beings, this is only natural.
That is precisely why I believe individual investors should not make decisions based solely on reasons like ‘because the experts say so’ or ‘because the financial institution recommends it’.
6. Our actions are driving the structure
There is one more thing I would like to write about.
Starting a savings plan with NISA. Moving money from savings to investment.
That is an extremely rational choice for an individual. I do it myself, and I have been writing about it in this note for a long time.
However, on the other hand.
The flow of funds from savings to investment is certainly shaking the funding structure of regional financial institutions.
The government’s policy of ‘from savings to investment.’ The Financial Services Agency that has promoted it. And the banks themselves, which have carried out that policy on the ground, are finding themselves in a difficult position in terms of funding as a result.
This twist in the structure is quite interesting.
It is not a matter of anyone being at fault. It is just that I want to be an investor who can imagine how each of our actions affects the entire financial system.
7. Rising interest rates do not necessarily mean higher profits
The simple understanding that ‘rising interest rates equals banks making money’ cannot explain what is happening now.
Even in the same interest rate hike phase, the resilience of major banks and regional banks differs. There are banks where deposits are gathering, and banks where they are fleeing. There are banks that can withstand valuation losses, and banks that postpone them by changing classifications.
There is no uniform correct answer in the world of finance.
This is exactly the same in investment.
Do not judge things by simple cause-and-effect relationships like ‘because interest rates rose, this will happen’ or ‘because the market rose, this will happen,’ but look at the structure behind it.
I believe that is the condition for someone who can make their own judgments without being swayed by information.
*This article does not evaluate or recommend any specific financial institution or financial product.