Interest Rates are rising or so the pundits say. Fed changed some wording on a sacred document and the market is convinced money will cost more. Usually banks do well in a rising interest rate environment. Lock in low cost deposits and capital. Lend and invest at variable rates and watch the spread expand.
True that but only so far.
Credit cards are fixed rate. They really have not come down as interest rates declined. After you chew through the tricky mumbo jumbo of a basic card holder agreement most credit card users are paying around 20%. Many are paying something north of that like 28% plus difficult to avoid fees.
That’s the way it used to be before the financial crisis. The banks may attempt to increase fees but the election cycle consumer turning into political pressure will be too high.
So spreads will narrow and that’s on the good accounts. The high risk accounts will increase defaults and the mathematical algorithms will start to invalidate.
Got that: The spreads will start to narrow as funding costs start to go up.
Not good for financial institutions. Wonder what the stress tests are showing on this fissure.
George Gutowski writes from a caveat emptor perspective.