How Interest Rates Impact Banks' Bottom Line: A Look at History

Interest rates play a vital role in how a bank makes money—both directly (i.e. driving loan, securities and deposit pricing and borrowing costs) and indirectly (i.e. impacting loan  demand,  default  rates,  and  capital  markets  activity).  Over the  past  30  years, interest  rates  have  been  in  a  secular  decline  since  peaking  in  1981  (with  the  10-year Treasury  yield  currently  at  around  2.15 percent  vs.  nearly  14 percent  in  1981).  For  much  of  this period  (until  more  recently),  banks  have  maintained  liability-sensitive  balance  sheets, taking  advantage  of  faster  declining  funding  costs  (liabilities)  vs.  slower-declining investment  yields  in  loans/securities  (assets).  However,  with  10-year …