TEXTBOOKS say that banks make money by raising deposits relatively cheaply from savers and lending them, at a higher rate, to borrowers. The difference between the two rates is known in the trade as the “net interest margin” (NIM), and its size is an important factor in banks’ profits. But as the financial crisis prompted central banks around the world to lower interest rates almost to zero (and below, in a few cases), banks have been in a quandary. They cannot lower deposit rates enough to be able to lend at a decent margin, since most assume that depositors will not tolerate negative rates. Instead, they have watched the NIM shrink (see chart on next page), and tried to recoup some of the lost profits by raising fees.
America’s 5,600 banks have therefore eagerly been awaiting the turn in the interest-rate cycle, in the hope that higher rates will bring a wider NIM and thus fatter profits. Since January 28th, when Janet Yellen, the chairman of the Federal Reserve, suggested the first increase was not too far off, bank shares have risen by 11%, much more than the market as a whole. In a presentation in February, JPMorgan Chase,...Continue reading
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