“The regional banks rely more on the business of taking in deposits and making loans,” “Right now deposits have little value because rates are so low and the loan demand is very minimal.”
Hence, if market determined US government bond rates were to increase, money would move out of deposits and into money market funds and govt debt. Hence the regional banks would suffer the most from a spread between FED rate and the market interest rate increasing.
Hence, a increasing cost of borrowing for the US government can be negative for banks, especially regional banks.
Less deposits means less money to make loans, hence less credit supply for the American household.
Also banks hold plenty of govt debt, which means more marked to market write downs.
"The Federal Reserve announced last week that it would keep its benchmark interest rate at a record low at least through mid-2013. The persistent low rate is preventing regional banks from turning an increasing deposit base into earnings growth because of flatter yields".
Furthermore, if economic growth is 1 percent or less in the next one to two years, profit estimates for large U.S. lenders including several regional banks may be slashed as much as 30 percent, according to analysts at Deutsche Bank AG.
With lower-than-expected loan growth, regional lenders will continue cutting costs
Total credit-loss provisions among U.S. banks plunged 60 percent in the first quarter this year from the same period in 2010
SOURCE: Bloomberg news.
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