Back when banking was heavily regulated, the “three-six-three” rule prevailed. Bankers would pay 3% interest on depositors’ accounts, charge a 6% loan rate when lending out the depositors’ money and, with a profit practically assured, tee off on the golf course at 3 p.m. “Bankers’ hours” were a real thing at the time.
Starting in the 1980s, deregulation ushered in more intense competition. But even so, banks should be feasting these days. With the economy chugging along nicely, banks with household names are still paying peanuts to many depositors and charging much more in interest on loans: Mortgage rates recently topped 7%. That should be money in the bank.
The trouble with the banking sector isn’t the current conditions so much as those of the past. America’s banks are struggling to adapt as interest rates continue to soar. While rising rates provide more opportunities to make money on the spread between deposits and loans, they also put pressure on existing loans and investments made before the big run-up in rates. Low-interest loans and bonds lose value when higher-interest versions become available.
Making matters worse is the disaster unfolding in the market for office properties. Many banks made five-year loans at rock-bottom rates when commercial real estate was surging just before the pandemic. In the aftermath, with the rise of remote work, that same real estate has lost value and stopped generating cash flow. That makes it nearly impossible to refinance at today’s higher rates, which have swiftly turned good loans into bad loans.
The financial system survived the shock of three quick failures this past spring when Silicon Valley Bank, Signature Bank and First Republic Bank went under. Americans may look back on August as the month when the broader peril to the financial system became obvious.