![]() ![]() The 10-Year Treasury (the benchmark of all interest rates in the economy) had an average yield of 1.84% in 2016, which grew to 2.91% in 2018. STI recently merged with Branch Banking and Trust Company (BB&T) to form Truist Financial Corp.Before the recent return of near-zero percent interest rates and quantitative easing, it’s fair to say that we’ve been experiencing a rising interest rate environment. I will also provide a simple example, using SunTrust Banks, Inc (STI) financial statements from 20. How quickly banks adjust, IEA/IBL mostly depends on their Asset/Liability Management, which I won’t address for the sake of simplicity. The change in interest rates will determine how quickly banks adjust their IEA (primarily loans) and their IBL (mostly deposits). NII is a bank’s primary source of revenue and what determines its profitability beyond other sources of income and expenses.Why is this important? It’s essential to understand the fluctuations in interest rates determine a bank’s financial position. ![]() ![]() ![]() These liabilities include NOW (negotiable order of withdrawal) accounts, saving accounts, money market accounts, etc.The difference between a bank’s IEA and their IBL is what’s known as the net interest margin (NII). At the same time, banks pay interest on their interest-bearing liabilities (IBL). First, it’s important to understand how depository institutions make money.Banks earn a return on their interest-earning assets (IEA), which can be anything from commercial/industrial loans, real estate loans, personal loans, trading securities, credit cards, etc. ![]()
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