Why This Low-Rate Environment Is Even More Difficult for Banks
It's no secret that many banks tend to do better when interest rates are rising. That's because the net interest margin (NIM), the difference between what banks pay for deposits and earn on loans, tends to rise when interest rates are rising, as long as banks can keep deposit costs from increasing too much. In March, the Federal Reserve quickly dropped its benchmark rate from 2% to zero, which is a big move because the Fed typically moves in quarter-point increments in calmer economic waters.
In a low-rate environment, banks can typically offset some of the pain from smaller spreads by lending more. Borrowers, often lured by lower monthly interest payments, jump at the opportunity to get a loan. That's why the Fed will lower rates when it wants to jump-start the economy, because it makes lending easier and debt easier to repay. But the coronavirus pandemic has made everything more complicated. Here's why this low-rate environment is different for banks right now.
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Source Fool.com
