For bankers stuck with slim yields on stagnant pools of loans, higher interest rates might seem like a welcome prospect. But it's no sure bet that policy tightening by the Federal Reserve would cause net interest margins, complex beasts that they are, to snap wider.
Data over the last decade or so has hinted at a positive link between how steep the yield curve is and how wide NIMs are. Such a relationship would seem to hold to the extent that banks lend long and borrow short, though imbalances in the durations of assets and liabilities are risky. The relationship looks weak, however, when you examine quarterly NIMs since late 2001 at a group of 600-plus banks that are publicly traded.
There is simply a lot of noise in NIMs. Whereas the industrywide aggregate was whipsawed, for example, by a temporary boost to yields at a few mammoth credit-card issuers that adopted new accounting rules in the first quarter of 2010, the median NIM for the banks examined here has moved in a tighter range.
With short rates pinned near zero by the Fed since late 2008, all the action on the yield curve lately has been driven by movements further out on the maturity spectrum.
The average yield on 10-year Treasuries was higher over the course of the fourth quarter than it was during the third quarter, and it climbed higher still to 1.95 percent during the first quarter this year. Yet the industrywide yield on earning assets continued to drop. It fell 11 basis points in the fourth quarter, and then another 11 basis points in the first quarter to 3.72 percent, according to the Federal Deposit Insurance Corp.
Broadly, over a two-decade horizon that spans two recessions, NIMs have ground down as lending has moved off bank balance sheets. In the aggregate, NIMs fell 75 basis points from 1992 to 2012, to an industry average of 3.42 percent.
An important factor for short-term changes in margins at banks is whether they are generally positioned to be hurt or helped by a simultaneous move in rates across the curve.
Regulatory data on the amount of assets that will mature or reprice within a year, minus liabilities with the same shelf life, can be aggregated across the industry. More short-term assets generally suggest greater asset sensitivity, meaning asset yields could change faster than funding costs (though the measure is flawed because it does not capture the offsetting impact of derivatives or other hedges). With a median ratio of net short-term assets to total assets of 5.6 percent at yearend, top-tier holding companies appear to be a bit more asset sensitive than they were when the Fed last began tightening in the middle of 2004.
During that cycle, the central bank lifted short-term rates by about 4 percentage points to about 5 percent by 2006, long-term rates were comparatively stable, the yield curve turned negative, and margins generally narrowed.
This time is different than the mid-2000s, though. The Fed has deployed unprecedented maneuvers to pull down long-term rates, and margins have dropped to pretty low levels. Besides, higher rates could mean that the Fed has finally started tightening again because loan growthsluggish for so longis building up.