How Much Bank Stocks Can Gain From Higher Rates
In the earliest days of ultralow rates, banks benefited as their securities portfolios rose in value, loan defaults declined and funding costs dropped. Indeed, policy makers viewed low-rate policies as supporting banks and the broader economy.
Yet those benefits faded as loans refinanced at lower rates and one-time boosts to bond and loan portfolios ran their course. Over time, gains dissipated and lower rates remained, squeezing bank profit margins.
.. Between 1996 and 2006, U.S. banks had an average return on assets of 1.23%, according to Federal Deposit Insurance Corp. data. Since 2010, the average has been just 0.94%, the data show.
.. If U.S. banks had earned the precrisis average return, cumulative earnings.. would have been around $1.07 trillion. Actual earnings were around 27%, or around $250 billion, less, according to FDIC data.
.. Regulators have required banks to hold more equity. That, combined with lower returns on assets, has led to far lower returns on equity. Between 1996 and 2006, the return on equity for U.S. banks averaged 13.65%, according to FDIC data. Since 2010, the average has been 8.40%.