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Higher interest rates are both helping and hurting big banks

SACHA PFEIFFER, HOST:

Higher interest rates are hurting homebuyers and stocks. They're also affecting the big banks, the multibillion dollar behemoths many of us use for checking, savings, loans and credit cards. But for them, rising rates are a blessing and a curse. NPR's David Gura joins us now to explain why. Hi, David.

DAVID GURA, BYLINE: Hey, Sacha.

PFEIFFER: Let's start with the blessing part. How do higher interest rates help the big banks?

GURA: So it'll come as no surprise that as the Federal Reserve has hiked interest rates aggressively, the largest banks in the U.S. have made a lot of money on lending. And you may have noticed that even as the Fed's benchmark has gone up, interest rates on savings accounts have not kept pace. So banks have been able to pocket more money because there's this wide gap between how much they're paying us on what we keep in our savings accounts and what we are paying the banks in interest on loans.

Now, the biggest banks just told Wall Street how they performed over the last three months on earnings calls. While higher mortgage rates have given them a new way to make more money, several bank CEOs emphasized they are still making money off of what they lent before at lower rates. And the reason for that is most people have kept up with their payments. Brian Moynihan of Bank of America talked about this on "Bloomberg TV." Even with the Fed Reserve raising interest rates, so much of the U.S. economy is still strong.

(SOUNDBITE OF TV SHOW, "BLOOMBERG TV")

BRIAN MOYNIHAN: Consumers are spending. They have money. They're employed. You can see the unemployment numbers. And they have good credit. And that's good news for America, but it also makes the Fed's job suffer because they're trying to slow down this American consumer, which is a very resilient thing.

GURA: And banks, Sacha, have benefited from that resiliency. Another bright spot is credit card usage. It's up at Bank of America, also at JPMorgan Chase and Citigroup.

PFEIFFER: All right, David, that's how higher interest rates have helped the big banks. How has it hurt them?

GURA: You know, traditionally these big banks have made most of their money from corporate clients, managing their money, but also helping them with mergers and acquisitions or laying the groundwork for companies to go public. That part of the banking business has really slowed down for a couple of reasons related to the Fed's policies. One reason is, as the cost of borrowing has gone up, the number of those types of deals has gone down. On top of that, companies are worried about the economy. They're worried about a recession, and that has made them less comfortable taking on risk.

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JAMES GORMAN: We had zero interest rates for a decade. We have massive monetary and fiscal stimulus. We have the first land war in Europe in 70 years, the highest inflation in 40 years and the Fed had to move. And with that, there will be consequences.

GURA: That's James Gorman - he's the head of Morgan Stanley - talking about this economy that he characterizes as uncertain and difficult. The CEO of Citigroup calls it complex. This is a very tricky environment for these banks to operate. We talked about lending. That has been a positive, Sacha. Banks are making money trading stocks and bonds and currencies. You know, these kinds of big swings that we've been seeing in the markets are opportunities for banks to both buy and sell.

PFEIFFER: So bottom line, what are the big bank CEOs saying about their economic outlook?

GURA: So James Gorman does not think a recession is inevitable. He didn't say so on the conference call. Jamie Dimon does. He's the CEO of JPMorgan Chase. But regardless, all the big banks are being more cautious, even as they trumpet the successes that they had in recent months. There is going to be an adjustment. Here's Goldman Sachs CEO David Solomon on CNBC this morning.

(SOUNDBITE OF ARCHIVED RECORDING)

DAVID SOLOMON: We're reversing what's been a very, very long period of relatively easy economic conditions. And as you do that, at some point there's going to be a bigger impact on consumer behavior, on market behavior.

GURA: And everyone, including banks, is going to feel the effects of higher interest rates. Demand for home loans, for instance, is already down. And as unemployment goes up, which is expected as a consequence of the Fed raising rates, that's likely to lead to more delinquencies. The big banks say they're getting ready for that. They're setting aside hundreds of millions of dollars to cover potential losses, emphasizing, Sacha, they'll be ready for whatever happens, and they're all better prepared than they were in 2008 and 2009.

PFEIFFER: That's good news. NPR's David Gura, thank you.

GURA: Thank you. Transcript provided by NPR, Copyright NPR.

David Gura
Based in New York, David Gura is a correspondent on NPR's business desk. His stories are broadcast on NPR's newsmagazines, All Things Considered, Morning Edition and Weekend Edition, and he regularly guest hosts 1A, a co-production of NPR and WAMU.
Gus Contreras
Lisa Lambert
Sacha Pfeiffer is a correspondent for NPR's Investigations team and an occasional guest host for some of NPR's national shows.