With interest rates declining further and retail bank deposits remaining sticky, banks’ interest margins continue to narrow, reducing their profitability. Going forward, this may reduce their willingness to lend. A related concern is that the reduced profitability prospects encourage banks and other financial institutions to take excessive risks and build up leverage.
Notwithstanding some recent improvement in tax revenues, state and local governments still face tight budget situations and continue to cut real spending and employment. Real purchases are also declining at the federal level.