"The prolonged low-interest rate environment is transforming the banking industry from savings and loans to service and loans," said Dan Geller, executive vice president of research firm Market Rates Insight in San Anselmo, Calif. (Fitzpatrick) Consumers may think that the continued low interest rates are a profound thing, but banks on the other hand think much differently. Consumers are refinancing their houses at rates as low as 2.875%, while big banks like Hudson City Bancorp Inc., a mortgage lender, are being forced to sell themselves to M&T Bank Corp. These super low interest rates are complicating the industry’s journey to a recovery from the financial crisis. In the article” Low Rates Pummel Banks”, from the Wall Street Journal, Dan Fitzpatrick further explains the negative effect of long term low interest rates. Fitzpatrick describes it as “Borrowers Benefit, but Industry Lending Profits Hit Lowest Level in Three Years”. (Fitzpatrick) Usually, we would believe it to be true that lower interest rates are a good thing, because they make it cheaper to borrow. Like so, there are those in support of the lower rates for example, the Fed and the consumers. For the past four years, since the 2008 financial crisis, the Federal Reserve Board had been trying to bounce back the US economy. The short term interest rates are extremely low and by purchasing more bonds they are reducing long-term rates. In all this has lowered the Ten-year U.S Treasury yields to 1.43%, the lowest since World War II. (Fitzpatrick) The Feds see this as a positive because they believe the low rates increase the economic growth along with employment. They support their belief by stating that the low rates make it easier and cheaper for companies and individuals to borrow money. These low rates developed, in part due to the Fed, have sprung a rush in the mortgage refinancing industry.
The growth in mortgage refinancing has assisted fee revenue at two major companies, J.P. Morgan Chase & Co. and Wells Fargo & Co., which control nearly half of the mortgage market. Wells Fargo decided to keep nearly $10 billion of residential mortgages, which they would normally sell to investors just in search of more yield. Fitzpatrick speaks of a woman in N.Y., Katherine Karl, which was able to refinance her house at 2.875%, who expresses that her desire to refinance was because of the historic low of interest rates. Many others like Karl have also taken opportunities to refinance their homes. Although those companies have survived, and Karl lowered her rate by 2.5 percentage points, not all are seeing such positive effects.
In an article by Robin Sidel of the Wall Street Journal, “Regional Bank Lands Big-City Deal”, we can see the downside of these low interest rates. (Sidel) Hudson City, a mortgage lender based in Parmus, N.J., has 135 branches, and has assets of $43.6 billion, decided to sell itself to M&T Bank Corp., which is a regional bank. Hudson City’s loan portfolio was largely focused in mortgages, due to the drop in interest rates and the refinancing, the value of the portfolio dropped along with the interest rates. Once Hudson City had started to see a devalue of their portfolio, they had considered transforming themselves into a commercial lender. However, after much thought the Chief Executive Ronald Hermance decided this would take too long and increase their staff tremendously. (Sidel)This then led to the selling of Hudson City to M&T Bank Corp. If interest rates continue to remain low we can expect to see more mergers and smaller banks selling out.
In Chapter 5 of the book, there is an application called “Explaining Low Japanese Interest Rates”, which can help better understand the negative effect of low interest rates. In the 1990s and early 2000s, Japanese interest rates became the lowest in the world, in November of 1998, the interest rate on Japanese six-month Treasury bills...