Journal looks at changing aspects of NIM, impact of pandemic on bank mortgage lending

The relationship between interest rates and net interest margin (NIM) has been much less pronounced recently for banks with high concentrations of longer-term assets, according to a report issued Thursday by the Federal Deposit Insurance Corp. (FDIC).

In its latest FDIC Quarterly (the agency’s journal summarizing current financial results for the banking industry), the agency points out that the interest rate/NIM relationship is important for understanding risks to banks during periods of rising and falling interest rates.

The FDIC said key portions of its report included findings that:

  • Banks with the highest share of long-term assets to total assets nearly always reported the least NIM expansion during upward rate cycles and the least NIM compression during downward rate cycles.
  • In most rate cycles since the 1980s, median NIM for the banking industry has increased in upward rate cycles and decreased in downward rate cycles. This relationship was true for both community and noncommunity banks.
  • The change in community bank median NIM was almost always smaller in magnitude than that of noncommunity banks, regardless of interest rate direction.
  • Both community and noncommunity banks have increased their share of long-term assets to total assets in the aftermath of the Great Recession.

In another report contained in the quarterly, the FDIC said it found that despite the economic downturn caused by the coronavirus crisis, “housing market fundamentals remained resilient and banks were well positioned to support growth in the mortgage market.” The report also asserted that despite the uncertain economic outlook, banks continue to extend residential loans.

However, the report also notes that – although mortgage credit performance improved after deteriorating at the start of the pandemic – high rates of delinquent loans reflect lingering financial distress for many borrowers. Further, the report notes, the coming expiration of federal programs that have aided homeowners dinged by the coronavirus crisis “raises concern about the possible increased risk of mortgage credit quality deterioration and reduced credit availability.”

FDIC Quarterly, June 17, 2021