<div class="bbWrapper"><blockquote data-attributes="" data-quote="Jonleehacker" data-source="post: 154814"
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Great stuff Randall, always enjoy your insights.<br />
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If interest rates tick up (or to be more accurate, when) won't banks banks get hit with even more difficulties making money as it will slow down lending?
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hey Jonleehooker, the banks' lifeline has been the low rates. The overnight rates have been pretty close to zero for a long time so banks have had access to free capital thus all of their carry should have been theoretically profit.<br />
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so the question begs what happens when rates start hiking. It's hard to forsee the demand for loans become even more anemic, but in theory that's what can happen.<br />
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but don't forget, the banks live on the spread so if overnight rates/Fed window rates increase, then the banks pass that rate hike to the borrower.... but if mortgage rates are so low today, why isn't there an increase in mortgage activity? <br />
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So in this environment theoretically we will most likely see further pressure on banks.<br />
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I didn't bring this up much in previous post, but banks still have a LOT of dead weight on their balance sheets that are allowed to be written off without affecting their announced performances. I just read the delinquency rate at the commercial mortgage back security level is above 9%.... <br />
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However, the other side of the coin is that the economy begins rolling at a expanding clip that forces Fed to raise rates to ease growth and inflation. In this scenario of a growing economy, interest rate hikes are a course of doing business and easier for the banks to sustain as more deposits are created. The demand for banking services increases in this scenario and typically banks will return to making profits from loan originations and higher margins.<br />
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This is how the interest rate cycles pretty much happened in the past - economy slows down, then Fed drops the rates and conversely when the economy heats up, the Fed jacks up the rates. <br />
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But I am afraid we are in a "new normal" because in my view, interest rate fluctuations will be more influenced by the effectiveness of quantitative easing (QE and QE2) instead of a direct reflection of the economy. <br />
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This is an entirely new dynamic that has not impacted the interest rates and money supply like it has in past cycles.</div>
