Tags: NBER | interest rates | banks | lending

NBER Study: Low Interest Rates Aren’t Increasing Lending

By Michael Kling   |   Wednesday, 06 Mar 2013 08:14 AM

The effort to use low interest rates to re-energize the economy may be backfiring, warns a study from the National Bureau of Economic Research (NBER).

The Federal Reserve’s long-running loose monetary policy — including multiple rounds of quantitative easing and Operation Twist is designed to encourage banks to lend.

Yet it might be doing the opposite, Fortune reports.

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According to conventional economic thinking, the Fed can encourage banks to increase lending by lowering short-term rates, which allows banks to borrower more cheaply.

However, lending remains constrained and credit tight several years after the financial crisis.

The NBER study indicated that’s because large banks — which control a larger share of lending than ever — are more likely to use long-term rather than short-term debt to finance lending, and therefore their funding costs are locked in, according to Fortune.

The study says lower interest rates make lending more expensive for 12 of the 16 largest banks.

The four largest banks hold about 40 percent of all loans.

“Low interest rates benefit lending, but it’s less than people think,” David Thesmar, a study co-author, told the magazine.

Ironically, increasing interest rates might be the best way to encourage large banks to increase lending, the study’s authors say.

But don’t count on that happening.

Low rates help boost the stock market and motivate households and businesses to borrow. Companies have borrowed through the bond market instead of directly from banks, Fortune reports.

Low rates have squeezed bank profits, according to The Wall Street Journal. Bank profitability, as measured by net interest margin, the difference between what banks pay depositors and borrowers pay banks, is the lowest in three years.

Low profits are forcing banks to increase fees for banking services, according to the newspaper, which could drive more people away from banks, increase the ranks of the nonbanked or underbanked and create a backlash against rising bank fees.

“The prolonged low-interest rate environment is transforming the banking industry from savings and loans to service and loans,” Dan Geller, executive vice president at research firm Market Rates Insight, tells The Journal.

“The longer the Fed stays down at these levels the more it will hurt banks,” adds Scott Lied, chief financial officer of ENB Financial Corp. “It’s painful.”

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