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Does A Rising Yield Curve Lead To Net Interest Margin Improvements?

Tyler Durden's picture




 

Common wisdom, which in this market of media-led hope and hysteria rapidly becomes the meme-du-jour, is that, as American Banker puts it, for banks that are currently earning slim yields on stagnant pools of loans, higher interest rates are a welcome prospect. However, in reality (that annoying fact-based world in which we really live) Net Interest Margins (NIM) are not so simple and linear and in fact. There is simply a lot of noise in NIM figures. Data over the last decade or so hints that there is a positive link between how steep the yield curve is and how wide net interest margins are - which makes sense to the extent that banks lend long and borrow short - but imbalances in the durations of assets and liabilities are risky and a more important factor for short-term changes in margins is whether banks are positioned to be hurt or helped by a simultaneous move in rates across the curve. The bottom line - rising rates and steepening curves do not infer higher NIM - facts are facts.

Over time - NIM is simply not that directly related to the curve steepness...


As is very clear from the scatter plots far from linear relationship...

Via American Banker,

For bankers earning slim yields on stagnant pools of loans, higher interest rates might seem like a welcome prospect.

 

Net interest margins are complex beasts, however, and it is no sure thing that policy tightening by the Federal Reserve would cause them to snap wider.

 

...

 

Data over the last decade or so hints that there is a positive link between how steep the yield curve is and how wide net interest margins 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.

 

...

 

There is simply a lot of noise in net interest income figures.

 

...

 

An important factor for short-term changes in margins is whether banks are positioned to be hurt or helped by a simultaneous move in rates across the curve.

 

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Tue, 06/04/2013 - 10:42 | 3623440 LawsofPhysics
LawsofPhysics's picture

A stable monetary/fiscal system requires that something or some tangible asset of real value is tied to your money and or interest rates, that use to be gold.  This is the only way to control/prevent capital and resource mis-allocation and mal-investment (you know, real fucking consequences for bad behavior < crickets >).  At this point, the bad actors and sociopathes are the ones being rewarded.  Returning to a sound monetary and fiscal system will require the elite to indict themselves.  Good luck with that, the outcome will be the same as it ever was, world war, hedge accordingly.

Tue, 06/04/2013 - 10:36 | 3623443 buzzsaw99
buzzsaw99's picture

If consumer loan and mortgage rates go higher originations will go into the shitter and they all know it.

Tue, 06/04/2013 - 10:49 | 3623474 LawsofPhysics
LawsofPhysics's picture

Indeed, tied to the ten-year, tick fucking tock...

http://www.marketwatch.com/investing/bond/10_year

 

Tue, 06/04/2013 - 11:31 | 3623611 PiltdownMan
PiltdownMan's picture

Some relation. But NIM has been plunging since March 2010. Probably more related to lousing mortgage applications, banks bread and butter for fees. See here.

http://confoundedinterest.wordpress.com/2013/06/04/zandi-economy-to-grow-at-3-after-bernanke-steps-down-bank-net-interest-margins-fall/

Tue, 06/04/2013 - 12:00 | 3623679 LawsofPhysics
LawsofPhysics's picture

Enough with the "growth" meme.  Maintaining growth in the human population and standards of living is not possible, hedge accordingly.

Tue, 06/04/2013 - 11:55 | 3623669 Stoploss
Stoploss's picture

I guess the bankers and other institutional holders of " cheap " real estate haven't figured out they are the housing bag holders..

 

Not a fucking word..

Tue, 06/04/2013 - 10:48 | 3623462 SheepDog-One
SheepDog-One's picture

The sun will go supernova in about 8 billion more years and will consume the earth and vaporize it....yes it will even consume and destroy the mighty FED central bank masters of the universe I know this is hard to believe but it's true....therefore yield curves and interest rates are all irrelevant anyway....enjoy some beers, play with your kids and dogs. 

Tue, 06/04/2013 - 10:49 | 3623472 LawsofPhysics
LawsofPhysics's picture

Now that is some long term thinking sheep-dog.

Tue, 06/04/2013 - 10:45 | 3623463 Confundido
Confundido's picture

This analysis mises the issue of credit risk migration. The manipulation in rates forces lenders not just to adjust duration, but pure credit risk, favouring HY marginally over IG. Therefore, without adjusting for such change in risk, not much can be said. And I don't see how one can do this adjustment (perhaps mainstream economists can, but no me). 

Tue, 06/04/2013 - 10:52 | 3623483 madbraz
madbraz's picture

Yes, but there are enormous derivative bets on spreads - the casino that banks and hedge funds play every day.  That's where they manipulate interest rates - the biggest dogs, of course.

Tue, 06/04/2013 - 10:56 | 3623493 Mr Bluesman
Mr Bluesman's picture

I really can't for the life of me figure out what possible good the bail out did in 2008: It only seems to have perpetuated the kind of 'Currency/Bond' betting scam that has been running main street into a ditch for the benefit of the spectulators since the Chicago Merc stopped trading Eggs.

Why didn't they seize the opportunity to kill the beast once and for all?

Tue, 06/04/2013 - 11:06 | 3623528 krispkritter
krispkritter's picture

OT but thought this was friggin' hilarious: 

19th century ship that smuggled weapons and may be filled with gold is found off the coast of South Carolina

 

The Ozama? Smuggled weapons? Gold? Is it too early for the rats to be leaving DC?

Tue, 06/04/2013 - 11:38 | 3623588 Mercury
Mercury's picture

The weighted average maturities of the banks' loan portfolios can't be the same across these time periods.

 

The takeaway for this current time period (spreads up, NIMs down) is that banks aren’t making many longer term loans.

Tue, 06/04/2013 - 13:27 | 3623972 Zero Govt
Zero Govt's picture

"Does A Rising Yield Curve Lead To Net Interest Margin Improvements?"

what a fascinating question... next

Tue, 06/04/2013 - 13:40 | 3624026 WezTheJuic
WezTheJuic's picture

Yupp.

 

Make me think of a  "singular event" within the financials.  Yet, I do not see that as of yet.  The prep work is definitley there.

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