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Bank Margins and Apple - September 24, 2019

“Concern About the Long-Term Effect”

 We’ve been watching commentators worry about banks and the potential effects of negative interest rates on their solvency for some time now. But while others have fretted and opined,  Philip Molyneux, Alessio Reghezza, and Ru Xie have been examining the specific effects of negative interest rate policy (NIRP). In “Bank Margins and Profits in a World of Negative Rates” (working paper), the authors study “a dataset comprising 7,359 banks from 33 OECD countries over 2012-16” and “find that bank margins and profits fell in NIRP-adopter countries compared to countries that did not adopt the policy”. Case closed? Not quite. While the authors’ results are “consistent with the hypothesis that NIRP has a negative impact on bank margins and profits”, the effects depend “on bank-specific characteristics”, including size, funding structure, and business models. Parallel to the comments from Philadelphia Fed’s Harker regarding firm funding, Molyneux, Reghessa, and Xie find that while the largest banks saw “a statistically insignificant contraction in margins” following the implementation of NIRP, “the smallest banks” “display a compression in margins of 17.83%”. The authors’ empirical findings conclude there is “a vicious circle where squeezed margins and low profits limit bank’s ability to retain earnings and build capital buffers” which ultimately “increases risks” and stifles “NIRP monetary policy transmission”.

However, a recent paper from the Cleveland Fed shows banks have not sat quietly as their interest income “has been impacted by the low interest rate environment”. Joseph Haubrich and Tristan Young find that while “total noninterest income has actually decreased”, service charges have increased. The increase in income, from items such as overdraft fees and ATM charges, “is masked in the data on total noninterest income because other types of noninterest income” fell. Will this trend reverse if rates change? Will service fees be reduced if margins increase? Don’t hold your breath. How the trends will “play out if interest rates increase from historically low levels remains to be seen”.

Nationalistic Buying”

In May, analysts saw growing negative sentiment as “Boycott Apple” movements continued to build around trade war developments. A recent survey of Chinese consumers shows this trend may be continuing. In “Apple’s Brand in China Takes a Hit From Backlash Against Trump”, Bruce Einhorn states not only did Apple tumble relative to Huawei in a recent sentiment survey “because Chinese consumers interpreted what happened to Huawei as an attack”, but other brands have also moved. “Patriotism helped fuel the rise of other Chinese brands, too”.

Apple may be losing its luster abroad, but it appears they have reached a détente with Trump, who tweeted that Apple would not receive a waiver for Mac Pro parts. In an announcement yesterday, Apple “confirmed its newly redesigned Mac Pro will be manufactured in Austin, Texas” thanks to a “federal product exclusion” they received for “certain necessary components”.

NIM before & after NIRP.png
Figure 2. Breakdown of Noninterst Income.png
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