Who is the Federal Reserve’s low rates policy hurting more? Big banks or small banks? To read the news today, you might be baffled — it’s hurting both.
The Wall Street Journal, in its Heard on the Street blog, reported today that big banks are getting squeezed by the Fed’s monetary policy. Essentially, banks’ net interest margins — “the difference between what they make borrowing money from depositors and lending or investing it at a higher rate,” to use the Journal’s words — are being pinched because big banks cannot find the kinds of returns they want on their lending.
These margins have been under particular pressure at the biggest banks because they tend to invest in shorter-dated, lower-yielding instruments. This reflects fear of getting caught out by a sudden increase in rates, a concern since the banks’ trading and investment books comprise a quarter to a third of total assets. J.P. Morgan, BofA and Citi all had net interest margins below 3% in the fourth quarter, compared with an average of nearly 3.9% for banks with less than $10 billion in assets.
Those fat cat community bankers are living high on the hog, then, right? Not so, says CNN Money. Low Fed rates have cut community bank profits, too:
Unlike bigger banks that make money on trading and fees, most community banks rely heavily on net interest margins…[which] at institutions with less than $1 billion in assets (what the FDIC considers community banks) rose slightly to 3.86% during the third quarter of 2011. (Emphasis ours)
Four percent would be ideal for these smaller banks, says CNN.
Indeed, banks both small and large must borrow short and lend long — that’s why banking is profitable, after all. What’s interesting is the apparent problem with scaling and the grass-is-always-greener effect at work. The WSJ seems to think that larger institutions are suffering more than smaller ones, and that community banks seem to think that bigger banks have more options at hand.
Should the economy continue to improve, banks both large and small should see this problem fade away, as lending activity will increase. And as lending activity increases, the economy will improve. We’ve been plenty patient with them, perhaps they should be with the Fed.