Fed’s caution could see banks take $5bn hit

by Ryan Smith29 Mar 2016
Retail banks in the U.S. could be looking at a $5 billion hit from the Fed’s failure to raise interest rates this month.

The Fed had held interest rates near zero for years before finally raising them in December, and the plan was to raise them again in March, with three further rate increases this year.

Unfortunately for the big banks, whose profit margins are impacted by the lower rates, it was not to be. The Federal Reserve decided against a rate hike this month, and there are only two planned increases for the rest of the year.

And that change of plans might cost the banking industry about $5 billion, according to a Financial Times report. As it is, U.S. Bancorp CEO Richard Davis described waiting for rate increases as “torture” last year – and in 2015, the industry’s net interest margin, the different between the rate at which banks borrow and which that at which they lend, hit its lowest level since records started in 1984, the Financial Times reported.

That’s not to say current interest rates affect every bank equally. According to the Financial Times, a 1% interest rate hike would cause earnings per share at Bank of America to skyrocket 13% -- but Wells Fargo would only see a 1% increase.

But big banks all want to see rates go up – and they’re worried the Fed might back off even on the two rate hikes already planned.

“At this point, if banks could sign up for two rate hikes, they’d take it,” CLSA analyst Mike Mayo told the Financial Times.


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