Why do banks offer deposit interest rate higher than the Fed Funds rate?

The Fed rate is currently 0.25%. Capital One, ING and a handful of other banks are offering 1%.

Why?

The Fed Funds rate is an overnight rate and fluctuates day-to-day. You’ll find that longer term rates are higher and the banks expect you to keep your money on deposit longer than one day.

I would also imagine there are regulatory requirements at play–money on deposit from customers is probably treated differently than money borrowed at the fed funds rate.

Also because banks are not investing deposited money in boring federal bonds. They prefer to invest it in more jaunty endeavours such as repackaged mortgages on Illinois trailer homes, and Icelandic herring futures.

That depends on the type of product. Money market accounts invest in boring bonds (though not always federal) and are not allowed to trade fancy derivatives.

Also, the Fed’s various interest rates are not bond rates. The Federal Reserve loans money to banks. The Treasury sells bonds and notes for the federal government.

Banks certainly do invest in all kinds of financial instruments, but let’s not forget that many of a bank’s best investments are the loans that they offer to various customers - mortgages, car loans, credit cards, business lines of credit, etc. Mortgages might pay 3-4%, business loans 6-8% and credit cards are frequently 20-30%.

Going back to the OP’s question… the overnight rate is generally what’s paid on temporary cash that they haven’t invested/loaned in some other way yet. The banks don’t want to leave money there for long precisely because they’re not making much on it.