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A marginal look at bank margins


How have banks performed over recent years in this environment of very low interest rates? Banking can be complex, so it’s difficult to pinpoint exactly how low interest rates affect banks’ bottom lines. But there’s a simple measure in FRED that we can examine: the net interest margin. It calculates the ratio of a bank’s net income from assets to the level of those assets. (Put another way, it’s the interest banks earn on investments minus the interest they pay to their lenders and depositors divided by the total level of their interest-earning assets.) Of course, the devil is in the details, and the note on the FRED series page captures some of those details.

Did the lending rate decline less than the cost of funds? Or are margins being squeezed by the low interest rates? The graph seems to imply the latter, but it also shows a general tendency toward lower margins over the span of two decades, which hints that more may be at play here. Maybe widespread use of computers in the management of deposits and credits allowed banks to reduce costs and thus margins. Maybe there’s been increased competition. Maybe something else entirely…

How this graph was created: Search for “net interest margin” and add it to the graph.

Suggested by Christian Zimmermann.

View on FRED, series used in this post: USNIM


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