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With the Fed’s decision on interest rates on the horizon, the nation’s top banks are sitting on the edge of their seats, as they could make up to $10B if the Fed chooses to raise rates.
While an increase in rates would have mixed results for non-banking financial institutions and corporations, and negative impacts for wage earners, banks would see a hefty profit from their net interest margins—the difference between what banks pay to borrow in the short-term and the interest they charge on long-term loans.
These margins are determined by federal funds rates that gauge how much banks have to pay for government credit. With the low rates of the past seven years, the rates banks could charge borrowers steadily declined, pushing net interest margins to three-decade lows.
But if interest rates were to rise, the top banks could make billions, including JPMorgan Chase (shown: JP Morgan Chase CEO Jamie Dimon), which could make an estimated $2.7B in cost-free profits if interest rates increased by 1% over the coming year (though only a 0.25% jump is expected). A rate hike would also shake up the stock and bond markets, which would be profitable for the bank’s trading arms. So as the Fed makes its decision this week, keep an eye on what the big banks are planning. [IBT]
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