Banks are mostly healthy as they feast at a good spread

Pat Dalrymple
Staff Photo |

First, we hear about how bad off banks are. Four years or so ago, we were told that the U.S. banking business was a financial sinkhole, with profit a quaint term relegated to the mists of the 20th century.

Now, suddenly it seems, banks are in pretty good shape. There are a few sick ones, hanging on, waiting for a purchaser or merger partner, but most are in fair condition, and not a few are doing very well, thank you.

We see that some mega banks are hit with billions (dollars or euros) in fines and are still turning a nice, and in some instances, a record, profit. How do they do this? It’s a one word answer: Spread.

America’s bankers are showing that they have a thorough understanding of what is maybe one of banking’s oldest tenets: the 3-3-3 rule: “Pay 3 percent on your deposits, mark your money up by 3 percent, and be on the golf course by 3:00.” Except, currently, the spread is better than 3 percent.

A look at the FDIC website that provides financial information on every bank and thrift in the country will show that, in many instances, the spread, or “net interest margin” as it’s called in bankerese, can be well above 4 percent.

Even banks on life support, that are compelled to invest a good portion of their deposits in government paper or mortgaged banked securities with correspondingly low yields, are showing spreads of 3.12, 3.25, 3.68.

All of this is possible because financial institutions currently pay very little, sometimes nothing, when they buy their inventory, money, at wholesale. Rates on loans are still at historically low levels, but yields, if any, on deposits, hark back to the 19th century. A couple of years ago the joke was that, soon, banks would be charging the public to keep their money. The laughter has died down a bit as everybody wonders if that could really happen.

As the world economy improves, and the demand for money increases, spreads will shrink. Competitively, it’s a lot harder to mark your retail price up 100 percent when you’re paying 5 percent wholesale for your commodity. This situation won’t last, but it’s been a big factor in getting banking back on its feet.

This ability to buy cheaply from the public and sell at a healthy margin is why people still want to get into banking, despite all of the personal and financial risk that comes with the draconian regulation in the wake of the financial crisis.

Depositors scream when they earn 1 percent on their retirement money, but they benefit by borrowing at lower rates than they’ve ever seen in their lifetimes, so probably nobody’s getting ripped off.

But, when other businesses look at banking, there must be some head shaking. Wouldn’t a car dealer just love to buy that SUV at $10,000 and resell it at $30,000?

Pat Dalrymple is a valley native. He’s been in the mortgage and banking business since 1961. He’ll be happy to answer your questions or hear your comments. His e-mail is

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