An Illustrated History of U.S. Banks Net Interest Margins

Below is a chart I created showing the net interest margin of U.S. banks (click for larger image):

As you can see, the blue line is the net interest margin for all U.S. banks. Glancing at the data, you can see the net interest margins peak sometime in 1993 and from that point on, net interest margins have been in decline. Gee, I wonder if that has anything to do with total consumer credit beginning its 15-year long march upwards? (See my previous posts on consumer credit: What Portion of Past Economic Growth Was Debt-Fueled? and Predictably, Consumer Spending Declines).

Bank net interest margin peaking in 1993 I feel is more evidence that late 1992 and early 1993 was a real economic turning point for this country. People started to borrow and spend without abandon based on rising productivity, increased incomes, increasing asset prices, increasing home and land values, etc. I can only surmise this meant there was a lot more money out there in the economy, competition between banks for that money was fierce, and therefore net interest margins for the banks began to decline.

Another thing I find interesting is that the “small” banks with average assets under $1B seem to always have had a much better net interest margin than the “large” banks with average assets greater than $15B. The graph below shows the difference between the small and large bank net interest margins (click for larger image):

Since 1984, the average net interest margin spread between small and large banks has been 112 basis points. Another interesting thing is that the spread seems to fall a good deal during and after a recession, but once the economy gets going again, the spread then widens again. Perhaps this is because the large banks have usually been the ones to benefit most from government attention and from their closer relationships with the Fed and Treasury? Being too big to fail probably has its competitive advantages in moments of economic instability or crisis…