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 [8], 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 [8],
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.


