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Bankers bullish on a Fed rate hike

By Claes Bell ·
Tuesday, December 15, 2015
Posted: 5 pm ET


The Federal Reserve boosting rates may be bad news for those who still haven't quite recovered from the Great Recession. But it might be great for banks!

A survey of bank executives released this week by Promontory Interfinancial Network, a financial services firm based in Arlington, Va., shows bankers are feeling hopeful about the effects of a Fed rate hike that's expected at the Federal Open Market Committee meeting on Wednesday.

Of the 207 executives polled, more than 50% said they expected the rate increase would have a "somewhat positive" or "very positive" effect on their business. On the other hand, fewer than 30% said they expected the impact to be "somewhat negative" or "very negative."

That's interesting, because in normal times, rate hikes typically squeeze bank profits. The interest rates banks pay to customers tend to move in step with the short-term federal funds rate, which the Fed sets. On the other hand, most of the rates on the loans that banks make money on, such as auto loans, are longer-term rates set by the market.

So when the Federal Reserve raises rates, banks typically have to make higher payouts on consumer deposits in the short term, while waiting for longer-term rates to catch up (if they ever do). That's probably why, in the same survey, almost 70% of respondents indicate they expect their funding costs, which include interest payments to depositors, to increase.

But this has been anything but a normal time in the banking business. We've been living in a near-zero rate environment since the Fed slashed rates to next-to-nothing 7 years ago. To maintain anything close to their normal net interest margin, which is the difference between what a bank earns on loans and what it pays out in interest, relative to assets, banks would have had to push rates they paid to depositors down past 0% and into negative territory.

Since they can't charge negative rates of interest, the next best thing is having all rates move back up, so that the net interest margin can stop being squeezed against that zero lower bound and go back to something like normal.


That might benefit consumers as well. While banks will probably be slow to pass on rate increases to consumers in the form of higher interest on their deposits, if banks can go back to making more of their money as they traditionally have, by taking deposits, making loans, and pocketing the spread between the two, they may look to make less by charging fees such as overdrafts and ATM fees.

And of course, even a small amount of additional interest may help savers, who've had a long, hard slog at this point.

What do you think? Do you expect banks to pay higher interest rates or stop boosting fees as rates return to normal?

Follow me on Twitter: @claesbell.

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