Tuesday, March 21, 2017

Banks and Rising Rates

I'm at the car park, the airport
The baggage carousel
The people keep on crowding
I'm wishing I was well
I said it's no occasion
It's no story I could tell

There is a theory out there positing that banks like higher rates brought about by recent short term rate increases by the Fed. The primary thrust of the argument is that higher rates should improve bank margins by allowing banks to charge more for loans.

Any positive impact, however, should be transitory. As noted at the end of this piece, banks will need to increase what they pay to borrow funds from depositors as short rates move higher. Moreover, higher lending rates result in less demand for credit (ECON 101) and, by extension, less economic activity in general.

From the above chart, does it look like bank stocks have been helped or hurt by ultra easy ZIRP/NIRP central bank policies over the past decade? Those easy policies are now in the process of reversing.

Over the past few days, perhaps investors have started to grasp what higher rates actually mean longer term for this sector.

no positions

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