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by tomatocracy
1048 days ago
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What has happened across the banking sector is that net interest margins have improved because rates charged on loans have moved up more quickly than rates paid on deposits. That might yet be offset by higher credit losses but it's too early to know. In any case, it's expected that deposit rates will catch up (in fact they already are starting to) and net interest margins will continue to shrink a bit from where we are now. However, there is also an argument that across the system, bank net interest margins were actually abnormally low for much of the period of zero/sub-zero interest rate policy. Essentially there are two reasons for this: - There was a pretty effective zero (or close to zero) bound on the interest rates they could pay on deposits. Even before rates were negative this would have compressed net interest margins as banks typically paid below the policy rate on much of their deposit base historically. - Large amounts of central bank liquidity added to the system (through all the various programmes - LTROs etc) allowed weaker banks to fund themselves more cheaply, leading in turn to lower interest rates charged on lending than a market without this additional liquidity would have led to In a way, you can see this in the fact that the stock market consistently priced banks at a meaningful discount to book value for a long period of time. The effects of this net interest margin compression were also not spread evenly across the sector. Weaker banks arguably suffered from these effects much less than stronger banks and perhaps even saw a net benefit. |
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