The Fed Won't Threaten Banks Yet

In the following video, Motley Fool financial analysts Matt Koppenheffer and David Hanson discuss Ben Bernanke speaking with Congress today, and the coming end of the Fed's quantitative easing policy. As quantitative easing comes to an end and interest rates rise, banking stocks could take a hit as their net interest margin compresses even further. Should investors be preparing for this? David and Matt discuss what the effects of this could be on banks, and how investors should react.

Bank of America's stock doubled in 2012. Is there more yet to come? With significant challenges still ahead, it's critical to have a solid understanding of this megabank before adding it to your portfolio. In The Motley Fool's premium research report on B of A, analysts Anand Chokkavelu, CFA, and Matt Koppenheffer, Financials bureau chief, lift the veil on the bank's operations, including detailing three reasons to buy and three reasons to sell. Click here now to claim your copy.


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  • Report this Comment On May 23, 2013, at 1:07 AM, kenthedem wrote:

    The concern here is that in a rising interest rate environment if a banks assets (loans) reprice faster than their liabilities which fund those assets (checking accounts, cd's) the bank will suffer compression of their interest rate margin and therefore revenue. True...but not for all banks!

    If the majority of the banks liabilities are in "core" deposits (checking, low interest savings) the increase in costs is minimized (checking accounts will remain at zero percent interest). Additionally banks which have put substantial funds with the fed at 1/4% interest, are able to roll some of that funding over to loans at 4% or bonds at 2-3% to help offset margin compression.

    Banks which rely on short term CD's for much of their funding are at the greatest risk (many of the smaller regional banks), while banks with a large deposit base (i.e. Wells Fargo) are more insulated from it.

  • Report this Comment On May 23, 2013, at 1:11 AM, kenthedem wrote:

    Sorry I meant to say if their liabilities reprice faster than their assets!

  • Report this Comment On May 23, 2013, at 10:05 AM, sluggo47 wrote:

    This is a misleading video at best.

  • Report this Comment On May 23, 2013, at 10:06 AM, TMFKopp wrote:

    @kenthedem

    Good points. Of course it still ends up a question of minimizing the risk. Risk is still there. But it's not like it's an unseen risk -- we're seeing (for example) a lot of banks keep the duration of their assets pretty short so that they can benefit sooner from a rise in rates.

    And rising rates or falling rates... what banks really need is some solid recovery in the real economy.

    Matt

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