The current interest rate scenario, with near-zero short-term rates and rising long-term rates, is dampening the earnings power of U.S. banks, says Moody’s Investors Service.
In a new report, the rating agency indicates that low short-term rates are limiting the banks’ net-interest income, which makes up the majority of revenue (between 50% and 75%) for most U.S. banks. While banks have reduced their own funding costs, with them now close to zero there is little room to reduce them further, it says.
And, at the same time, rising long-term interest rates have slowed mortgage originations and reduced security values, which is negative for banks too, it says.
Moody’s notes that the rise in long-term rates is not enough to derail the improvement in banks’ net charge-offs and non-performing assets that began to gain steam in 2010. However, it also warns that a bigger rise in long-term rates “would significantly increase the cost of mortgage loans and slow the U.S. housing recovery, undermining further improvements in banks’ asset quality, particularly related to residential real estate.”