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 …
How Interest Rates Impact Banks’ Bottom Line: A Look at History
HFA Staff
The post above is drafted by the collaboration of the Hedge Fund Alpha Team.