How Low is Too Low?

Recently, I read an article by Dan Patrick of the Wall Street Journal detailing how superlow interest rates, while certainly beneficial to borrowers, are hurting bank profits and the industry’s ability to recover from the financial crisis.  According to Mr. Patrick, some of the negative effects of these artificially low rates we could see are more Americans being pushed out of the financial system altogether due to higher costs for banking services as well as an accelerated “shakeout” of smaller banks.  This begs the question, how low is too low?  Here’s an excerpt from the article:

Superlow U.S. interest rates are squeezing bank profits, complicating the industry’s nascent recovery from the financial crisis.

An important gauge of lending profitability, known as net interest margin, has dropped to its lowest level in three years. The measure tracks how much banks earn when they borrow from depositors and then lend or invest those funds.

The squeeze is the flip side of the Federal Reserve Board’s four-year effort to revive the sluggish U.S. economy, with near-zero short-term interest rates and repeated rounds of bond purchases that aim to reduce long-term rates as well. Ten-year U.S. Treasury yields hit 1.43% in July, their lowest level since World War II.

Banks will be forced to consider new ways to make money by changing the services they offer, industry observers said. At the same time, higher costs for banking services could push more Americans out of the financial system altogether, adding to the millions of customers viewed by regulators as under-banked, or lacking access to affordable financial services.

 

Read the full article here.

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