The yield curve is steeper than it has been in more than six years, but few bankers are betting that the steepening will translate into higher earnings.

"The long end of the curve is high and quite steep, perhaps because the funding environment is still uncertain," said Gary Crittenden, the chief financial officer at Citigroup Inc., said in an interview last week. "People can see the next inning, but not the outcome of the entire game."

Investors are demanding high returns, he said, and the deleveraging taking place across the economy "may create a reverse multiplier effect that would reduce the money supply."

The government's counteroffensive includes the Troubled Asset Relief Program, which is plowing capital into banking companies.

"If the $700 billion from Tarp is used as capital you can leverage it and turn it into much more benefit to this system," Mr. Crittenden said. "When the banking system recovers, the current liquidity being injected into the system could facilitate longer-term a high level of activity. There could eventually be 'over shooting' in a way."

Even the most optimistic bankers say the widening gap between the yields on two- and 10-year Treasury notes will not affect the bottom line at financial companies until the middle of next year.

Wider margins are likely to be undercut by the continued lockup in the credit markets that has stymied lending and forced many bankers to price deposit products aggressively and build reserves for nonperforming loans.

"I don't think there is going to be a lot of lift from the yield curve, to be honest," said Keith Leggett, a senior economist at the American Bankers Association.

Credit markets remain "fairly clogged up, and you're not seeing a big drop in the cost for funds," Mr. Leggett said in an interview Monday. Those factors "are going to minimize any gains and keep the margins tight."

The two-year Treasury has hovered around 1.3% lately, and the 10-year has hovered at 3.75%. The last time the banking industry enjoyed such a healthy spread was from November 2001 to July 2002, when the economy was emerging from the last recession, according to the ABA.

Dana Johnson, the chief economist at Comerica Inc., said the short end of the curve is unlikely to change much as long as the Federal Reserve Board keeps the federal funds rate low. The long end could decline if signs of deflation surface, though he "we're not talking about a dramatic" drop in that case.

David Hendler, a CreditSights Inc. analyst, said bankers remain "traumatized" and cannot benefit from a steep yield curve if they are not lending.

"It is going to take time for lenders to rebuild their confidence," Mr. Hendler said. Changes to lending standards "have to work their way through the system, and a secular problem like that doesn't get corrected in a couple of quarters."

Phillip Green, the chief financial officer at Cullen/Frost Bankers Inc. in San Antonio, said lending will resume and will be priced better. "All of our loan officers had been beaten up in recent years over price, and I think that is changing."

Robert Albertson, the chief strategist at Sandler O'Neill & Partners LP, advised bankers to focus on building securities portfolios over direct lending.

"The spread income there is the consolation prize to banks when natural credit demand wanes," he said.

Issues in the credit markets have constrained funding sources, forcing many bankers to offer lofty deposit rates to maintain desired liquidity levels. It has been common for financial institutions to offer certificate of deposit rates above 4%.

"There is virtually no spread today" taking into account CD rates, said Christopher Marinac, an analyst at FIG Partners LLC. "New loans are coming in at greater rates but … the banks really aren't making much money."

The final challenge is credit quality, where problems continue to worsen and have shown signs of spilling over in recent quarters from housing-related loans to commercial and industrial ones. Some bankers have said chargeoffs and loan-loss provisions could peak early next year, but the consensus is that credit costs will stay elevated through next year or longer, cutting into net interest income.

The length and duration of the recession are critical.

"It is quite likely that the current recession will extend well into the next calendar year … but it could be worse than that," Mr. Johnson said.

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