Why Banks are Making Less Money

In a 9/28 AP article, Joe Belbruno articulated it well,

Savings and loan associations, also known as thrifts, are financial institutions that specialize in accepting savings deposits and making mortgage loans. These federally or state-chartered institutions hold the majority of their assets as home mortgages.

Thrifts earn revenue in the form of interest on long-term loans. The money to make loans comes from deposits. Thrifts incur an expense in the form of interest on short-term deposits. Long-term interest rates are almost always higher than short-term rates, which is why thrifts can profit. Recently, however,

The Federal Reserve has increased short-term interest rates 11 times, or 2.75 percentage points, since June 2004, while long-term rates have remained stagnant. This narrowing gap between short and long term interest rates, also known as a flattening yield curve, is putting the squeeze on lenders even during a period when new loan development continues to surge.

Indeed, I expect the proliferation of loan products is itself a factor in the continued stagnation of long-term rates.

Tags: Business

Updated at: 6 October 2005 6:10 AM