Banks may be struggling to make money with interest rates perpetually near zero, but falling loan default rates are easing some of the lenders’ burdens to profitability, Capital Economics said Friday.
Falling loan default rates are cushioning bank profitability at a time when ZIRP is making it difficult to make money on interest, according to Capital Economics analysts Paul Ashworth and Paul Dales.
In fact, aggregate incomes in the U.S. look much better than expenditures, with gross domestic income increasing 2.7% annually in the first quarter. Gross domestic product increased only 1.9% during the period, a much slower rate when compared to income levels.
“Those gains in income are still accruing mainly to firms rather than households, however,” Ashworth and Dales said. “Personal disposable incomes barely edged higher, particularly in real terms, while corporate profits were boosted by a further rebound in the financial sector.”
The real force behind bank profitability is the sharp decline in loan default rates.
Capital Economics believes Ben Bernanke’s testimony in front of Congress next week will be telling since job creation in May slowed. Even with banks profitable and defaults declining, the research firm says weakness on the jobs front could reopen discussions about another round of Fed asset purchases.
