from the Dallas Fed
— this post authored by Pavel Kapinos and Alex Musatov
For the overall U.S. banking system, the effect on profitability of yield-curve flattening – the lowering of the difference between the yields of shortand long-term debt – lasts about a year and is relatively small. After the first year, the impact on large banks’ profitability becomes positive; for smaller institutions, it stays negative and becomes larger. Recent yield-curve flattening is likely to more strongly affect smaller banks, reducing their profitability.
An analytical and forecasting mainstay, the yield curve has been routinely used to forecast a variety of economic outcomes, including recessions. The yield curve refers to the rate at which debt interest rates change from shorter to longer maturities. Usually, short-term rates are lower than those of longer maturities.
Low short-term interest rates over a protracted period and a diminishing yieldcurve slope – the result of a narrowing “term spread” between short- and longterm rates – have motivated academics, policymakers and analysts to reexamine the yield curve’s effect on macroeconomic and financial variables. An analysis shows that the link between the term spread and banks’ profitability is alive and well, though its strength varies by bank size.
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Source
https://www.dallasfed.org/~/media/documents/research/ eclett/2018/ el1808.pdf