NY Fed on Low Rates, Regulations
The Federal Reserve Bank of New York's Liberty Street Economics blog published two pieces of interest to the money markets recently. The first, "Low Interest Rates and Bank Profits," discusses "how harmful low rates have been to banks," while the latest, "Market Liquidity after the Financial Crisis," talks about how regulations have hurt liquidity. The Low Rates piece says, "The Fed's December 2015 decision to raise interest rates after an unprecedented seven-year stasis offers a chance to assess the link between interest rates and bank profitability. A key determinant of a bank's profitability is its net interest margin (NIM) -- the gap between an institution's interest income and interest expense, typically normalized by the average size of its interest-earning assets. The aggregate NIM for the largest U.S. banks reached historic lows in the fourth quarter of 2015, coinciding with the "low for long" interest rate environment in place since the financial crisis. When interest rates fall, interest income and interest expenses tend to fall as well, but the relative changes -- and the impact on NIM -- are less clear. In this post, we explore how NIM fell during the low-interest-rate period, finding that banks mitigated some, but not all, of the impact of lower rates by shifting into less costly types of liabilities. Our analysis also gives insight into how NIM may respond to the new rising interest rate environment." The Fed's latest piece says, "The possible adverse effects of regulation on market liquidity in the post-crisis period continue to garner significant attention. In a recent paper, we update and unify much of our earlier work on the subject, following up on three series of earlier Liberty Street Economics posts in August 2015, October 2015, and February 2016. We find that dealer balance sheets have continued to stagnate and that various measures point to less abundant funding liquidity. Nonetheless, we do not find clear evidence of a widespread deterioration in market liquidity."
