Trouble For Banks

Forbes reports the coming trouble in loan loss provisions:

A rise in provisions would come at a bad time for many banks. Banks make money by pocketing the difference between the short-term rates they pay to borrow money and the longer--and usually higher--rates they receive when they lend. But the gap between the two, as reflected in the yield curve, has been falling.

In the first quarter, the difference between the federal funds rate and that of ten-year Treasury bonds was 177 basis points, or 1.77%. Last quarter, the gap shrunk to 122 basis points, or 1.22%.

As a result, several banks have seen net interest margins narrow. Bank of America, for instance, saw its margin fall a frighteningly large 30 basis points, or three-tenths of a percentage point, to 2.81% last quarter. Hoping to end the pain, some banks have even taken charges to restructure their balance sheets by selling off mortgage-backed securities or unwinding interest-rate swaps.

A sell off in mortgage-backed securities would mean higher mortgage rates.Plus with the 30 year treasury bond coming back next year:all this could affect the housing market.