Rising interest rates, whenever they materialize, may not help banks as much as many investors expect.
Conventional wisdom has it that rising rates and a steeper yield curve will reverse the trend that has squeezed banks’ net interest margins—the difference between what they earn on investments and their cost of funding—to their thinnest in 24 years.
But a new paper from researchers at the Chicago Fed indicates that this effect might be much smaller than many think—especially for large banks. Even a very sharply steepening yield curve has a small effect on bank profits, the report says.
A 1 percentage point increase in the spread between 3-month and 10-year Treasuries—which would be a large move by historical standards—is associated with just 0.008 percentage points of additional net interest margin at banks with assets of $10 billion dollars or more.
Rising rates don’t help much either. A 1 percentage point rise in short-term rates generates an extra 0.003 percentage points in the average net interest margin of banks with $10 billion or more, researchers found.
What really juices profits, according to the paper, may shock you: economic strength.
Source: The WSJ
