Recent results highlight difficulties at the country’s most famous financial institution
perspective, it seems like a torrid time to be a banker. A handful of financial institutions failed in the first quarter of the year after their depositors fled, spooked by the impact of higher interest rates. After these failures, smaller banks struggled to keep hold of deposits, pushing up their interest costs. At the same time, the economy is cooling, owing to higher rates, raising the prospect of job losses and defaults.
Things are much sunnier for the rest of America’s big lenders, however. Despite the recent turmoil, between July 14th and July 18th they reported strong quarterly results. Their seemingly perverse success is explained by the fundamentals of banking. When a financier provides a loan he must consider two things above all else. The first is the interest he can expect to receive. By handing over $100 he might hope to earn, say, $5 a year for the life of the loan, before the $100 is paid back.
Add this all up and quarterly net interest income, minus provisions for loan losses, has hovered at around 1.4% of total loan books a quarter, or about 6% annualised, throughout 2023. This is higher than at any time since 2005. Forget the turmoil: so long as you do not work at Goldman, there has rarely been a better time to be a commercial banker. JPMorgan even posted its best ever quarterly profits.
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