NEW YORK – In the long-term, the effect of the Fed keeping rates low will have a positive effect on bank profitability, although some may be feeling pain now, Federal Reserve Board Chairman Ben Bernanke said Thursday.
“…In the longer term the overall effect on bank profitability of an appropriately accommodative monetary policy is almost certainly positive,” Bernanke told the Future of Community Banking Conference, according to prepared text of his comments, released by the Fed,
He said policymakers discuss “the effects of the configuration of interest rates on banks and other financial institutions” when debating monetary policy.
While the spread between yields on Treasuries and other “safe assets” and the rate paid on deposits “is currently relatively low .... banks' net interest margins also depend importantly on the difference between the return on the loans the banks make and the return on their alternative investments in safe assets. When loan demand is weak, forcing banks to hold low-return safe assets instead of lending, net interest margins suffer.”
By keeping rates low to spur the economy, “loan demand and opportunities for profitable lending” will rise and provide other benefits, ultimately resulting in higher net interest margins. “In short, it is necessary to set the negative effects on net interest margins against the positive effects of a strengthening economic and lending environment,” Bernanke said. “Moreover, the benefits of a stronger economy for the performance of existing assets should also be taken into account; as you know, delinquencies decline as the economy improves.”