Monday, February 11, 2013

Rising Rates Will Help Banks

The management of a bank boils down to a tradeoff between the higher interest rates earned on the assets (assets are longer term) and lower interest rates paid on liabilities (on-demand deposits like checking and savings accounts). The difference is called the net interest margin, and is currently very low. As interest rates rise,while the value of the currently held loans will go down, new loans will be issued at higher rates, slowly improving the net interest margin equation.See the WSJ:
This is similar to a landlord being able to lock in higher rents as rents go up even though old rents look low. It helps future margins.

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