So if interest rates go up would bank stocks be a good investment?
Question:
intrest rates hurt everything =/
A higher national interest rate does not make banks more profitable. It means they have to pay more for the money they lend.
Probably would be LESS profitable. Here is a detailed explanation. The interest rate you hear about on the news all the time is the federal funds rate, which is the interest the Fed wants banks to charge each other for borrowing bank reserves (the rate mentioned is the target rate, which the Fed tries to achieve primarily by altering the money supply). Banks need reserves (cash in vault or on account with the Fed) as collateral in order to have customer deposit accounts. They loan out excess reserves, because it earns them interest, unlike money just sitting there in the vault. This is their main source of income. Banks may borrow reserves from other banks, charging each other near the Fed. funds rate, and these reserves then allow them to make more loans. But (and here's the key point I'm trying to make), in order for this operation to be profitable, the interest rate they charge customers on loans must be greater than the interest they're charged on borrowed reserves. Therefore, they charge higher interest on loans, so when the interest rate increases, banks don't really make more money... they simply pass the interest rate increase on to customers. However, higher interest rates make investment more costly for banks (when they want to expand for instance) just like for any other business, so they will earn less on their investments and make less money. Remember that the Fed tries to use interest rates to control both inflation and the economic growth rate, among other things, and higher interest rates are usually not good for any business, including banks, even if they keep the economy healthy in the long run.
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