Secret of NIM: Bank Net Interest Margin Climbs With Fed Funds Rate Increases

This is a syndicated repost courtesy of Confounded Interest. To view original, click here. Reposted with permission.

Bank Net Interest Margins are on the rise again, along with The Fed Funds Target rate.

In September 2007, The Federal Reserve dropped their target rate rapidly as economic conditions deteriorated. One of the by-products of The Fed’s rate decline was the spike in financial institutions and the amount of interest paid out to their lenders (for example, deposits), relative to the amount of their (interest-earning) assets. In other words, high loan rates compared to deposit rates.

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But as loan interest rates fell with Fed monetary easing, we got to 2015 where net interest margin fell to its lowest level since Q4 1984.  The difference today is that net interest margin is rising with Fed Funds rates increases.

The good news? The M1 Multiplier is actually on the rise again, but is still below 1.

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The M1 Multiplier of less than 1 means that every dollar created by the FED (an increase in the monetary base M0) will result in a <1 dollar increase of the money supply (M1). So, the credit and deposit creation of commercial banks is limited in this case, but improving. The banks are still holding on to a lot of excess reserves. 

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When will The Fed unleash the staggering amount of excess reserves? That is the Secret of NIM!

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