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Journal Article
Why Do Net Interest Margins Behave Differently across Banks as Interest Rates Rise?
Rising interest rates can influence bank profitability positively (by increasing payments from those with floating-rate debt) or negatively (by forcing banks to offer higher returns to their depositors). Although most banks became more profitable as the Federal Reserve raised rates in 2022–23, a smaller group of banks saw consistent decreases in their net interest margins (NIMs). Understanding why these banks’ NIMs declined may provide useful insight to policymakers concerned with vulnerabilities in the banking system.Brendan Laliberte and Rajdeep Sengupta explore the differences in bank ...
Journal Article
The Implications of Unrealized Losses for Banks
nterest rates have risen across the yield curve since the Federal Open Market Committee began tightening monetary policy in March 2022. After amassing securities during the pandemic, commercial banks saw rising interest rates erode the value of their securities portfolios by nearly $600 billion, or about 30 percent of their capital holdings. In some cases, declines in valuation of securities holdings in response to interest rate changes—known as “unrealized losses”—can mechanically reduce key regulatory capital and liquidity ratios. Should banks need to sell the securities to generate ...
Journal Article
Community Bank Funding Is Getting Costlier and Riskier
Banks’ core funding has been under pressure since the Federal Open Market Committee (FOMC) began raising rates in early 2022. As depositors shift funds out of low-yielding savings and noninterest-bearing deposit accounts and into more lucrative alternative investments, community banks have increasingly turned to longer-maturity deposits and borrowings to finance their balance sheets. Although these funding sources allow banks to retain their asset size, they are both more expensive and potentially less stable.