Banks and interest rates：Administer with care
——Low interest rates are squeezing banks’ profits. Higher ones may do the same
2013年07月04日 摘自：The economist共有条评论
BE CAREFUL what you wish for. Bankers in the rich world have moaned incessantly over the past few years about how low interest rates are squeezing the life out of the banking system. Now that long-term interest rates have risen in anticipation of the Federal Reserve’s “tapering” of asset purchases, and changes in short-term rates seem closer than they once did, some are wondering whether higher rates are all they are cracked up to be. Rising rates may restore banks’ profitability but too sudden an increase may damage their health.
Banks usually make most of their money on the spread, or difference, between the rate of interest they pay savers and the one they charge borrowers. This spread has narrowed as policy rates in rich countries have fallen, because loans have become cheaper but rates on deposits can go no lower than zero. In America, for instance, the average “net interest margin” at banks supervised by the Federal Deposit Insurance Corporation has fallen to its lowest level since 2006 (itself a 16-year low for small banks). Meagre profits have encouraged some banks to make riskier loans or buy riskier assets in a hunt for yield.
An increase in interest rates would fatten net interest margins at those banks where the rates they charge borrowers rise more quickly than their own cost of funding. SNL Financial, a data firm, reckons that big American banks would gain from higher rates as, on average, a greater share of their assets than of their liabilities would reprice within a year. One exception is Citigroup, which could see its interest margin squeezed. Banks in Japan stand to gain from higher rates, too, according to Nomura. Higher rates may also be good for investment banks, which should benefit from increased trading and volatility in bonds if yields keep rising.
Elsewhere the outlook is less sanguine. The Bank of England, releasing its annual report on financial stability on June 26th, fretted that margins at British banks may at first be compressed as rates rise. In Germany small savings banks are also at risk because they offer fixed-rate loans while taking variable-rate deposits. A similar area of vulnerability in America may be in credit unions, a type of financial co-operative, which have also taken on interest-rate risk through fixed-rate lending funded by variable-rate deposits.
Interest margins change relatively slowly. The immediate threat to banks is a fall in the market value of assets that banks hold. As yields of government bonds and other fixed-income securities rise, their prices fall. Because the amounts of outstanding debt are so large, the effects can be big. In its latest annual report the Bank for International Settlements, the Basel-based bank for central banks, reckons that a hypothetical three-percentage-point increase in yields across all bond maturities could result in losses to all holders of government bonds equivalent to 15-35% of GDP in countries such as France, Italy, Japan and Britain (see chart).
Here again the effect on banks would vary widely from country to country. Government bonds account for less than 2% of the assets held by British banks, compared with about 25% of assets in the case of Japanese banks. But simply looking at holdings of government bonds probably understates the risk to banks of an upward lurch in yields, since they hold many other fixed-income assets that would also fall in value. Some 40% of British banks’ assets would have to be revalued if interest rates were to rise abruptly, according to the Bank of England. Furthermore, banks may be indirectly exposed to losses on fixed-income securities through other channels—loans to clients that are big holders of these instruments, say, or changes in the value of securities that are held as collateral.
A third risk to banks from higher rates is that more of their customers will struggle to repay their loans. Quantifying this risk is difficult since loan losses are influenced not just by interest rates but also by economic growth and employment, both of which would need to improve for central bankers to dial back their interventions. Even so, there are worrying signs. In Britain almost a fifth of secured loans have gone to households that have less than £200 ($307) a month left after paying essential costs, according to the Bank of England. Higher rates could push many into default. The dilemma for policymakers is that keeping rates low for long is dangerous. So is letting them rise too quickly.