Do Higher Interest Rates Widen US Bank Margins? Net Interest Margin, the Level of Rates and the Slope of the Yield Curve, 1984–2020, and a Repricing Identity That Explains a Near-Zero Answer

It is widely believed that higher interest rates and a steeper yield curve raise banks' net interest margins. I test this with the FRED quarterly series for the net interest margin of all US banks, 1984Q1–2020Q3 (147 quarters), against the 3-month Treasury bill rate and the 10-year minus 3-month spread. In levels, both coefficients are positive (0.1207 and 0.1520 percentage points of margin per point of rates, R-squared 0.519). The positive level relation does not survive a linear trend: with a trend, both coefficients turn negative and the trend is -0.0578 points a year, because margins and rates both declined over the period. In quarterly changes the effects are small and not significant: a one-point rise in the bill rate changes the margin by 0.0118 points in the same quarter and by -0.0121 points cumulatively over five quarters. I derive the identity that the sensitivity of the margin to the policy rate equals the asset repricing beta minus the liability beta times the ratio of liabilities to assets, and show that it is close to zero when banks pass on rate changes to borrowers at a slightly higher rate than to depositors. The margin averaged 4.122% in 1984–1993 and 3.158% in 2016–2020.