Banks Pummeled by Low Rates

 

An article in the Wall Street Journal dated October 23, 2012 stated that due to the current “superlow” interest rates in the United States, the Banking Industry is experiencing its lowest net profit margin in three years.  

The eroded net profit margin (which tracks how much banks earn on funds borrowed from depositors which are in turn lent or invested) has caused sliding lending profits, causing banks to close branches, weigh additional fees and roll back customer favorites, such as free checking.  The average margin for the industry’s largest banks is at 3.12%, the lowest since 2Q 2009.  

Over time, these downsized profits are likely to accelerate a downsizing process that has halved the number of insured institutions over the past two decades.  The spread between banks’ deposits and lending rates has narrowed in part because of low Federal Reserve-influenced rates and decreased demand for loans amid the soft economic growth.  As their higher-yielding loans mature, banks are being forced to replace them with assets that carry much lower rates.  If interest rates begin to rise, these new loans may prove to be unprofitable. 

Higher costs for banking services could push more people out of the financial system altogether, adding to the millions of customers already considered as lacking access to affordable financial services.