Banks and Low Interest Rates

by Chris Sturr | December 06, 2008

Reuters on a conundrum banks face in hard times. Given the deleveraging and subsequent asst-writedowns the banks are still facing, this old problem makes the outlook for that sector even more dire.

Falling rates renew old problem for U.S. banks
Wed Dec 3, 2008 3:35pm EST Reuters
By Jonathan Stempel – Analysis

NEW YORK (Reuters) A plunge in U.S. interest rates to levels not seen since Dwight Eisenhower’s presidency means troubled banks must cope with an old problem they thought they had licked.

The yield fell below 2.7 percent this week for the first time since 1955 on the benchmark 10-year Treasury note. That happened after Federal Reserve Chairman Ben Bernanke said the central bank might buy longer-term Treasuries to help pull the economy out of a year-long recession.

An improved economy could help banks by limiting credit losses from the housing slump and other consumer and commercial debt, as banks work to reduce risk on their balance sheets, or deleverage. Capital infusions from the Treasury Department’s $700 billion bailout package could also ease rate pressures.

Yet falling long-term rates make it harder for banks to boost lending margins–the difference between what a bank earns on loans, and pays on deposits and to borrow –and make money.

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