The current ultra-low interest rates are hurting profit margins at banks that depend on the gap between what they charge borrowers and pay depositors to make money. Pension funds also are hurting, because they are under growing pressure to meet their retirees’ obligations. Meanwhile, some types of insurance are more costly as firms attempt to regain earnings that will continue shrinking until interest rates rise. Two years of low interest rates, coupled with the Fed’s plan to purchase as much as $900 billion of U.S. Treasury notes through the middle of 2011, have been a boon to borrowers such as companies, consumers, cities and states.
“It is clear that there are costs,” said Michael Cloherty, chief of U.S. interest-rate strategy at RBC Capital Markets. “The question is whether the good done by low interest rates is enough to justify forcing people and institutions to incur these costs.” Although many American banks have recovered from the subprime-mortgage meltdown and the Great Recession, others are finding that low interest rates are hurting their profitability.
Banks that say they have more than $1 billion in assets have seen their net interest margin (a performance metric that examines how successful a firm’s investment decisions are compared to its debt situations) fall to 3.74 percent as of September 30, compared with 3.85 percent in March, according to the Federal Deposit Insurance Company (FDIC). “We have probably seen the high-water mark for margins in the 3rd quarter,” said Mark Fitzgibbon, an analyst at Sandler O’Neill & Partners LP. “In the next several quarters, we will see it move lower.” Goldman Sachs Group’s Scott McDermott is advising clients – pension funds, endowments and sovereign wealth funds – that low interest rates are “going to be here for a while… Don’t assume that this environment will disappear next month or next year and things will go back to normal.”
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Foreign banks, American private equity firms and a leading Chinese sovereign wealth fund have been investing in commercial real estate in the United States in the hope that interest rates stay low.